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COLLECTION OF
RUSSIAN HISTORY
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UNIVERSITY OF IL.UINOIS BUUUETIN
Vol. XI November 17, 1913 No. It
12, at the post office at Urbana.
is. under the Act of August 24, 1912.]
UNIVERSITY OF ILLINOIS STUDIES
IN THE
SOCIAL SCIENCES
VOL.. II. NO. 4 DECEMBER,
The Development of Banking
in Illinois, 1817-1863
BY
GEORGE WILLIAM DOWRIE, Ph.D.
Assistant Professor of Economics in the University of Michigan
PRICE 00 CENTS
1 1 ED BY TI IE I V OF ILLINOIS
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\i. SCIENCES
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which will continue to be published independently ; but it
seemed desirable to bring the growing number of the mono-
graphs in these allied departments together in a separate
series. The following numbers of the "University Studies"
already published fall within this group :
Morgan, R. P. The decline of the commerce of the port of New York.
Vol. I, No. 2. 1901.
Icraft, H. L. The genesis of the Grand Remonsiraru
went to King Charles I. Vol. i, No. 4. 1902.
Gordon, ]. H. Illinois raihi'ay legislation and commission courts
1870. Vol. I, No. 6. 1904.
Paine, A. E. The Granger movement in Illinois. Vol I, No. 8. 1904.
Dickerson, O. M. The Illinois constitutional convention of 1862. Vol I,
No. 9, 1905.
Herron, B. M. The progress of labor organisations among women.
Vol. T, No. 10. 1905.
Moore, B. F. The history of cumulative voting and minority representa-
in Illinois, 1870-1908. Vol. in, No. 3. 1909.
Paetow, L. ]., The arts course at medieval universities, with special refer-
1910.
J. The origin of the land grant act of i iv, No. I.
1910.
UNI'. ILLINOIS STUDIES IN THE SOCIAL SCIENCES
Price
10 the
Editor of the :ty of Illinois, Urbana, 111.
UNIVERSITY OF ILLINOIS STUDIES
IN THE
SOCIAL SCIENCES
VOL.. II. NO. 4 DECEMBER, 1913
The Development of Banking
in Illinois, 1817-1863
BY
GEORGE WILLIAM DOWRIE, Ph.D.
Assistant Professor of Economics in the University of Michigan
PRICE 90 CENTS
PUBLISHED BY THE UNIVERSITY OF ILLINOIS
URBANA
COPYKIGHT, 1913
BY THE UNIVERSITY OF ILLINOIS
CONTENTS
CHAPTER I
PAGE
THE MONETARY SITUATION IN ILLINOIS PREVIOUS TO THE ESTABLISH-
MENT OF BANKS : 6
Few white settlers in Illinois before 1817 — Scarcity of money —
Animal skins formed principal medium of exchange.
CHAPTER II
THE TERRITORIAL BANKS 9
Four banks chartered — Provisions of the charter of the Bank
of Illinois — History of its operations — Provisions of the charter
of the Bank of Edwardsville — Its history — The Edwards-Crawford
controversy — Provisions peculiar to the charters of the Banks of
Cairo and Kaskaskia — Their failure to operate — Review of con-
ditions during the period — Analysis of the banks' statements.
CHAPTER III
BANKING A STATE MONOPOLY 22
Provisions of the Constitution of 1818 concerning banks —
First state bank chartered — Failure to operate — Second state bank
chartered — Opposition to the project — Provisions of the charter —
State bank notes issued to needy inhabitants of the state — Rapid
depreciation of the notes — The Coles investigation — Remedial and
relief legislation — The Edwards investigation — Further remedial
and relief laws adopted — Measures for the final settlement of the
bank's affairs — The Wiggins loan — The Duncan affair — Further
relief legislation — Analysis of the bank's statements — Extent of
the state's loss.
CHAPTER IV
BANKING AND INTERNAL IMPROVEMENTS 59
No local banks of issue from 1831-35 — Demand for new state
bank — New state bank chartered — Provisions of the charter — Old
Bank of Illinois revived — Bank of Cairo opened — Contest for
control of state bank Early operations of the bank — Effort to
obtain government deposits — Internal Improvement mania seizes
Illinois — State becomes majority stockholder in state bank and in
Bank of Illinois — Legislative investigation — Panic of 1837 — Banks
suspend — Suspension legalized — Crisis of 1839 — Banks again sus-
PAGE
pend — Investigation of state bank reveals excessive loans to
speculators — Banks and state in desperate situation — State bank
forced to resume — Suspension again authorized — Bank manage-
ment becomes reckless — Banks close their doors — Analysis of their
balance sheets — State bank placed in liquidation — Progress of the
settlement — Terms of the Bank of Illinois liquidation bill — Pro-
gress of the settlement of its affairs — History of the Bank of
Cairo — Illegal banking in Chicago.
CHAPTER V
THE FREE BANK SYSTEM OF ILLINOIS 131
No banks of issue from 1843-51 — New constitution provides
for general banking law — Free bank system adopted — Provisions —
Few banks established at first — Amendments of 1853 put an end
to illegal issues — B'ank commissioners' recommendations — 'Panic
of 1854 — Auditor's report and recommendations, 1855 — Large
amount of foreign paper in Illinois — Amendments of 1857 — Panic
of 1857 — Rapid increase in number of banks — Secession of South
causes collapse of the Illinois banking system — Comparative study
of different types of Illinois banks — Legislature reconstructs bank-
ing system — Constitution of 1862 providing for abolition of incor-
porated banks, rejected — Effect of national banking act and ten per
cent tax law — Legislature abolishes banks of issue.
PREFACE
Early Illinois banking passed through four distinct
cycles. The first originated and reached its climax be-
tween the years 1814 and 1819. The second began in 1821
and reached a culmination in 1824-25. The mania for
internal improvements in the thirties caused the develop-
ment of a third movement which came to a climax in 1837.
The adoption of the stock bank system in 1851 began the
fourth cycle which attained its highest point in 1860.
The results of this study show that in each of these
movements events follow a regular sequence: (1) An
urgent demand on the part of a needy community for a
plentiful medium of exchange; (2) The passage of a law
providing for a generous issue of poorly safeguarded
paper; (3) A brief period of fictitious prosperity largely
due to speculation; (4) A crisis which at first results in
the suspension of redemption and later in the collapse
of the bank of issue; (5) Hard times; (6) The develop-
ment of a strong anti-bank sentiment; (7) The beginning
of the next cycle after a surprisingly brief interval.
The method of treatment followed lias been to outline
the laws passed by the legislature and to show two things :
( 1 ) The causes which led to the enactment of the measures ;
and (2) The effect which the legislation produced upon the
community.
The material has been gathered from legislative
records, newspapers, banking journals, county and state
histories, and the letters and biographies of prominent
men. Special mention is due the invaluable treatise of
Governor Thomas Ford who was present at practically
every session of the legislature before 1846. The general
works of Knox and Simmer and the monograph on "State
Banks of Issue in Illinois" by Garnett have proved useful
in checking up conclusions drawn from common sources.
The thanks of the writer are especially due to
Professor E. L. Bogart and Doctor C. M. Thompson who
have read the manuscript of this study and made many
valuable suggestions. He is also indebted to the other
members of the department of economics at the University
of Illinois for numerous helpful suggestions.
5
CHAPTER I
THE MONETARY SITUATION IN ILLINOIS PREVIOUS TO THE
ESTABLISHMENT OF BANKS.
The first white settlements in Illinois were colonies
founded by French traders and missionary priests along
the Mississippi River. For local purposes these colonies
made use of Indian currency and pelts of wild animals
or of the certificates of deposit issued by the royal ware-
houses in payment for furs.1 The few commodities received
from the outside world were paid for by shipments of corn,
pork and skins "down the river". Little had been done
toward developing the resources of the territory when
France gave way to England in 1763.2
The coming of the English soldiers in 1765 caused
some of the two thousand French settlers to cross over
to the western bank of the Mississippi, but on the whole
conditions remained unchanged during the brief period of
British rule.3
After 1778 when George Rogers Clark took possession
of Illinois, the best element of the French population
migrated across the river and French influence upon Illi-
nois history was soon effaced. Moreover, American set-
tlers for a time came very slowly and it was not until
1800 that the population of Illinois again approximated
2500, the point it had reached fifty years before under the
French. During the next decade a somewhat larger tide
of immigration set in but it was not until the close of the
war of 1812 that there was a serious demand for banks.4
The people with the exception of a few small merchants
1Thompson, The Monetary Situation in Nouvellc France, Journal of
the Illinois State Historical Society, iv, 146.
-Thwaites, Jesuit Relations, Ixix, 143 fF.
8Alvord, Illinois: The Origins, g ft.
4Ibid.
6
365] SITUATION' PRIOR TO HANKS 7
were engaged in agriculture and the few needs of the
family were supplied at home. The flax field and the
flock of sheep provided the raw material for the house-
wife's spinning wheel and loom, while the house and its
furniture were constructed of the crude materials at
hand.5 In 1802 it was estimated that not one pioneer in
ten possessed a single dollar in specie.0 In fact, long after
the state was admitted to the Union, the receipt of a letter
involved a considerable search on the part of the recipient
for the twenty-five cents in specie which was the usual
postage on letters from the East.7 As far as the few local
transactions were concerned, the pelts of the beaver, the
raccoon, the wolf, and the deer were universally acceptable
and for a long time continued to serve as money in the
more backward portions of the state.8 "Wolf scalps were
as good as county orders and with bear, deer and 'coon
skins were exchangeable for tax receipts."9 When the
publisher of one of the early Illinois newspapers found it
impossible to meet his bill for paper in any other way, he
shipped to his eastern creditor nine and a half dozen deer
skins valued at six dollars apiece.10 The occasional pieces
of money which found their way into the West were eagerly
seized upon by the merchants and used in making remit-
tances to the East. In like manner the few notes of the
United States Bank which reached the West were even
more eagerly sought after on account of the smaller risk
attached to sending them.11 In 1810, according to the
census of that year, there were only 12,284 persons in
Illinois, and what little immigration there was was checked
-Perkins and Peck, Annals of the West, 714; Ford, History of Illinois,
41 ; Smith, St. Clair Papers, ii, 438, 439. Boggess, The Settlement of
Illinois, 1778-1830, 21-2
•Michaux, Travels, 226.
"Heylin, History of Pulton County, 702.
8Ford, History of Illinois, 43 ; Clarke, pub., History of Pike County,
104; Goodspeed, pub., History of Gallatin, Saline, Hamilton, franklin ana
Williamson Counties, 113.
9Goodspeed, pub., History of Gallatin, etc., Counties, 236.
lulbid., 113.
nMichaux, Travels, 127.
8 THE DEVELOPMENT OF BANKING IN ILLINOIS [366
by the outrages of the Indians before and during the
War of 1812.12
The close of the war marks a distinct transition in
the economic life of the people of Illinois. In the first
place there was a large influx of settlers who brought some
money with them and thus created a demand for a better
medium of exchange than animal pelts. Secondly, better
agricultural methods were introduced. The new settlers
instead of spending a large part of their time in hunting
and fishing, improved their land and built substantial
buildings upon it.13 Steamboats now plied between St.
Louis and the ports on the Ohio and Mississippi with the
result that Illinois produce could be marketed at a profit
and pieces of money became less of a curiosity to the
Illinois farmer.
Lastly, the passage of a liberal land law had stimulated
the purchase of Illinois farms to such an extent that
two land offices were established in the territory and by
1816 over half a million acres were sold.14 The whole
period from 1814 to 1819, in fact, is characterized by the
rage for speculating in farms and town lots, accompanied
by a persistent clamor for a plentiful supply of currency.
For this reason, the chief function of a western bank
seems to have been to manufacture paper money and issue
it on easy terms to the ambitious but impecunious in-
habitants.
12Greene, Government of Illinois, 119.
13Reynolds, My Own Times, 176; Boggess, The Settlement of Illi-
nois, 1778-1830, 118 ff.
"Ford, History of Illinois, 43.
CHAPTER II
THE TERRITORIAL BANKS.
The members of the territorial legislature were sub-
jected to constant pressure by their constituents to follow
the example of Ohio and Kentucky in each of which states
there had been established a number of private banks.1
They at length yielded to this demand and at their ses-
sions of 1816-17 and 1817-18 granted charters to the fol-
lowing institutions: the Bank of Illinois, the Bank of
Edwardsville, the Bank of Kaskaskia and the City and
Bank of Cairo.
The Bank of Illinois was located at Shawneetown,
a thriving settlement on the Ohio River just below the
mouth of the Wabash. The United States saline works
which produced about three hundred thousand bushels of
salt a year were only a few miles away, while a large
part of the tide of immigration made this point its first
stopping place in Illinois. At the time the bank opened
there were five hundred inhabitants, a number of stores and
taverns, a newspaper office, a United States land office
and a private bank, established in 1813. 2 The business
of the last named enterprise, however, passed into the
control of the Bank of Illinois.3
The charter granted to "the President and Directors
of the Bank of Illinois" contained the following provisions :
The capital stock of three hundred thousand dollars was
divided into shares of one hundred dollars each; one
third of them to be reserved for the territory or the pros-
pective state of Illinois, if the legislature cared to purchase
them. Business was to begin when fifty thousand dollars
had been subscribed and ten thousand paid in.4 No limit
1Ford, History of Illinois, 43.
2Woods, English Prairie, 129, 130; Report of the Comptroller of
Currency, 1876, p. 29; Moses, Illinois Historical and Statistical, i, 263.
3Knox, History of Banking in the United States, 712.
*Lcra>s of Illinois, 1816-17, p. n ff., Section i.
9
10 THE DEVKLOP.MKXT OF BANKING IN ILLINOIS [368
was placed upon the shares one person could own, but
during the first ten days' of subscription no one could
subscribe for more than ten shares per day. Owing to
the scarcity of specie the payment of only ten dollars
down in gold or silver was required, the rest to be paid
in notes of other banks at the discretion of the directors
so long as not more than twenty-five per cent of the whole
was asked for at any time and that after sixty days'
notice.6
The corporation was to continue for twenty years,
and during its life could acquire property to the extent
of five hundred thousand dollars.6 Its twelve directors
must be resident citizens of Illinois chosen by a plurality
vote of the stockholders. Holders of one to two shares
had one vote; two to ten shares, one vote for every two
shares; ten to thirty shares, one vote every four shares;
and so on, the proportionate influence of the larger stock-
holders lessening as the size of their holdings increased.7
Fifteen or more shareholders owning not less than fifty
shares could hold a meeting and appoint three of their
number to examine the books and papers of the bank.8
The corporation could hold no lands except such as
were necessary for the accommodation of its business and
those mortgaged as security for loans or bought at judg-
ment executions in the bank's favor. Its debts were not
to exceed twice the capital actually paid in, money on
deposit not being taken into consideration. If the directors
violated this provision they were personally liable for
the excess; but if a director could prove that he was not
present or that he voted against the violation of the charter
he was exonerated.9
In its dealings the corporation was limited to bills
of exchange, gold and silver, goods pledged and not re-
deemed and goods produced on the bank's lands. The
6Laws of Illinois, 1816-17, p. n ff., Section 2.
'Ibid., Section 3.
''Ibid., Section 7.
*Ibid., Section 7, Clause I.
*Ibid., Clause 7.
369] THE TERRITORIAL BANKS 11
rate of discount was never to exceed six per cent. If at
any time the bank suspended specie payment the holder
of the obligation upon which the payment in specie was
refused could collect twelve per cent interest until he re-
ceived his money.10
The committee appointed to receive subscriptions hav-
ing secured the necessary ten thousand dollars in specie,
the bank opened for business January 1, 1817. Shortly
afterwards, Secretary Crawford of the United States
treasury asked the United States Bank to designate certain
banks as additional depositaries of government funds, but
the arrangement was so unsatisfactory that it was termi-
nated the next year. Mr. Crawford himself thereupon
designated certain banks as "agents of the treasury",
among them the Bank of Illinois.11 Under the agreement
which went into effect February 1, 1819, the bank received
and deposited to the credit of the treasury all current notes
of such banks as maintained cash payments, but it had
the power to refuse to receive the notes of any bank upon
giving the receiver reasonable notice. All drafts upon it
by the United States treasurer were to be paid at sight
and all amounts above the fixed sum of fifty thousand
dollars allotted to the bank as a permanent deposit must
be sent to a branch of the United States Bank.12 If the
treasurer desired to pay a sum of money in the neighbor-
hood of Shawneetown he could do so even if the bank
were left with less than fifty thousand dollars. The Bank
of Illinois was required to make monthly reports of its
own condition and of its account with the federal govern-
ment. Every quarter it was required to add to the regular
monthly report a list of its debtors and the amount of
their obligations. The privilege ofVetaining within the
community a large share of the money collected by the
10Laws of Illinois, 1816-17, p. n, Section 7, Clause 9.
llNiles' National Register, xxvi, 290; U. S., H. of R., 18 Cong., I
Sess., Doc. no. 128, p. 4.
12A messenger from the bank carried the money in person to New
Orleans or Louisville, often undergoing great danger and hardships.
U. S., 18 Cong., i Sess., Report of the Secy, of Treas., 444, 525, 545,
SSL 565.
12 THE DEVELOPMENT OP BANKING IN ILLINOIS [370
local land office meant much to the people of Shawneetown
as well as to the bank, for the strict supervision by the
federal government prevented any serious deviation from
the course of legitimate banking. «...
Although the bank was required to meet its obligations
in specie, the legislature during the same session at which
the charter was granted, passed a law providing that all
executions should be subject to a stay of one year unless
the party bringing judgment should agree in writing to
accept in payment of the execution the notes of the Bank
of Illinois and several other western banks.13 Since the
legislature was not permitted under the federal constitu-
tion to make the notes legal tender14 recourse to such
devices as the above was necessary in order to protect
the debtor class which formed a large part of the popula-
tion of the territory. The members of the legislature
justified the act by the assertion that it would have been
utterly impossible for payment to be made in specie with-
out great sacrifice of property.15 This act, while it worked
injury to the bank as a creditor, was beneficial in so far
as it stimulated the circulation of its notes.
In spite of the fact that the Bank of Illinois enjoyed
an unusually good reputation for conservative manage-
ment,16 its progress was impeded by the attacks of its
enemies. A feeling of jealousy existed between the towns
of Kaskaskia and Shawneetown and between the Bank
of Missouri at St. Louis and the Bank of Illinois. Accord-
ing to President Marshall of the 'latter bank, the receiver
of public moneys at Kaskaskia pursued the policy of
shaking the public confidence in the Shawneetown bank
by one day accepting its bills in payment of dues to the
18The list included the banks of Cincinnati and Chillicothe in Ohio,
any bank in Tennessee or Kentucky and the banks of Vincennes and
Missouri. Laws of Illinois, 1816-17, p. 20, Section I.
"Article i, Section 10. ,
1&Laws of Illinois, 1816-17, p. 20.
19The Edwardsville Spectator, August 28, 1821 ; Gouge, The Curse
of Paper Money and Banking, 91, n. ; Niles Register, xviii, 78; Moses,
Illinois Historical and Statistical, i, 263; Andreas, History of Chicago,
i, 526.
371] THE TERRITORIAL BANKS 13
government and the next day refusing them.17 The Bank
of Missouri went a step farther in its hostility toward its
weaker rivals. It would refuse to accept their notes for
a time and then, in order to present a large amount for
redemption, would accept them freely. On one occasion
a representative of the Missouri bank appeared at the
counter of the Bank of Illinois and obtained twelve thous-
and dollars of its small supply of specie in exchange* for
Bank of Illinois notes.18 The Bank of Missouri seems to
have been an especial favorite at Washington for it re-
ceived an unusual share of the government deposits. It
was thus able to exercise a powerful control over its weaker
competitors. "Between powerful neighbors and domestic
enemies,"19 the organization and successful conduct of a
pioneer bank must have required a considerable degree
of ability and courage.
In spite of a severe financial stringency extending
over two years, the Bank of Illinois continued to carry
on its business and succeeded in maintaining specie pay-
ment until long after the banks of older states had sus-
pended.20 A few days before suspension was voted, the
directors had declared a dividend of eight per cent. The
editor of the Edwardsville Spectator attributed this to
the government funds on deposit, but the Shawneetown
Gazette replied that the bank enjoyed a good healthy busi-
ness irrespective of federal deposits and had never refused
to redeem a note on demand.21
The continued struggle in the face of conditions which
seemed to have no prospect of improvement at last ( 1823 )
forced the bank to suspend operations. By a succession
of compromises with its debtors and creditors it managed
to redeem all of its outstanding notes so far as they were
"Letter of Marshall to Edwards, in Edwards' Papers. 155.
"/Wd.
"/Wrf.
20Gouge, The Curse of Paper Money and Banking, 91, n. ; Bankers'
Magazine, ix, n; U. S., 18 Cong., i Sess., Report of Secy, of Treas.,
426, 570.
^Shawneetown Gazette, quoted in Edwardsville Spectator, August
28, 1821.
14 THE DEVELOPMENT OF BANKING IN ILLINOIS [372
presented; but other liabilities, among them a balance of
$28,367.85 belonging to the federal government, could not
ba met.22 When, however, after a lapse of fourteen years
the bank was reopened under circumstances which will
be discussed later, a settlement was made with the United
States, and several hundred dollars worth of the original
note issue was redeemed.23
The next bank to be established in Illinois was the
Bank of Edwardsville, which received its charter in 1818.
Edwardsville, though but a few miles from St. Louis, was
a town of considerable importance and a rival of Kaskaskia
and Shawneetown for the honor of being the leading com-
mercial center of the territory. The provisions of the
charter of the Bank of Edwardsville differed from those
of the Bank of Illinois in the following minor details:
(1) The bank could begin business when five dollars in
specie or bills of specie paying banks had been paid down
on each share;24 (2) There was no restriction as to the
number of shares to be subscribed for by one person;25
(3) The bank was not confined to a six per cent discount
as the Bank of Illinois had been, but could charge the
"legal rate;"26 (4) Instead of the cumulative plan of vot-
ing, the "one share one vote" plan was provided.27
The stock was placed on sale by a committee of promi-
nent business men of Edwardsville and when, late in the
year 1818, the requisite ten thousand dollars in specie,
or its equivalent, had been received the bank began busi-
ness.28 In the year or more that had elapsed since the
22U. S., H. of R., Letter of Secy, of Treas., 1838, Doc. no. 79, 780;
Andreas, History of Chicago, i, 526; Knox, History of Banking in the
United States, 714.
28U. S., H. of R., Letter of Secy, of Treas., 1838, Doc. no. 79, 780;
U. S. Reports on the Finances, 1829-36, p. 605.
24Laws of Illinois, 1817-18, p. 65, Section 2. The charter of the Bank
of Illinois required the payment of ten dollars in specie.
2r'Ibid. Under the Bank of Illinois charter no one person could
subscribe for more than ten shares per day during the first ten days.
2ttlbid., 69, Section 7, Clause 7.
-''Ibid., 68, Section 7, Clause i.
28Knox, History of Banking in United States, 713; U. S., H. of R.,
18 Cong., i Sess., Doc. no. 133.
373] THE TERRITORIAL BANKS 15
organization of the Bank of Illinois, conditions had become
less favorable for further banking enterprises; hence the
Bank of Edwardsville had an even more trying situation
to face than did the former institution.29
A few months after the bank began its operations the
directors called for the payment of the second instalment
on the shares of stock, but the financial situation through-
out the country was such that more than five thousand
shares had to be declared forfeited for non-payment.30
Among the letters of Mnian Edwards, one of the directors
of the bank, is one from Richard M. Johnson, afterwards
vice-president of the United States, protesting against
such action in the case of General Payne. Johnson inti-
mates that those who had been credited with making a
second payment probably were accorded the questionable
privilege of borrowing the money from the bank and using
their shares as collateral security.31
Through the offices of Edwards, who was then a sena-
tor from Illinois, the secretary of the treasury designated
the Bank of Edwardsville as well as the Bank of Illinois
a depositary of government funds. The conditions noted
in the case of the latter ba'nk applied also to the former
save that the permanent deposit of the Edwardsville bank
was but forty thousand dollars instead of fifty thousand.32
Although Edwards did not approve of Crawford's system
of letting out among a large number of banks funds which
should have been eared for by the Bank of the United
States, he preferred that the western Illinois collections
should be placed in his bank rather than that they should
be sent to the Bank of Missouri.33 Shortly after securing
29Letter of Marshall to Edwards, in Edwards Papers, 155.
files' Register, xvii, 186.
3lEdivards Papers, 162; see U. S., H. of R., 18 Cong., i Sess., Doc.
no. 133, pp. 44, 109. General Payne was the brother in law of Johnson.
The members of the Johnson family are said to have held a controlling
interest in the Bank of Edwardsville and to have used their political pres-
tige to influence Secretary Crawford's dealings with the bank.
^NileS Register, xxvi, 291. U. S., H. of R., 18 Cong., i Sess., Doc.
nos. 128, 133.
33N ties' Register, xxvi, 141.
16 THE DEVELOPMENT OF BANKING IN ILLINOIS [374
this favor for the two Illinois banks, Senator Edwards
returned to Illinois only to find that the Edwardsville
bank was having a hard time with the adverse business
conditions which then prevailed.34 It seemed to have even
greater difficulty than the Bank of Illinois in withstanding
the severity of the commercial depression and the on-
slaught of their common enemies, the Bank of Missouri
and the receiver of the public moneys at Kaskaskia.35
The directors of the Shawneetown bank, mindful of the
struggle that attended the launching of their project, were
on the whole friendly in their attitude toward the Bank
of Edwardsville, although in the spring of 1819 they
found it necessary to forbid their cashier to receive its
notes.36 This action was rescinded soon, however, for the
officers of both banks realized that they could ill afford
to exercise any but the most liberal policy toward each
other's paper. In fact, John Caldwell, an officer of the
Bank of Illinois suggested to Senator Edwards that at
certain times each bank should inform the other as to the
amount of the other's notes held by it and should make a
practice of sending these notes as far as possible from
the bank which issued them. He urged that neither bank
present the notes of the other for redemption unless "dire
necessity compels the unpleasant measure."37
As business conditions were daily growing less favor-
able to the bank's success, Senator Edwards decided that
he could no longer shoulder the responsibility for the
safety of the United States deposits which he had procured
for the bank. Consequently, he decided to sever his con-
nection with the bank's management, and asked President
Stephenson to notify Secretary Crawford of his action.
Since Mr. Stephenson was also receiver of public moneys
at Edwardsville, Mr. Edwards urged him to withhold from
the bank all government funds in his possession until Mr.
Crawford had had an opportunity to take whatever action
*4Niles' Register, xxvi, 142.
85U. S., 18 Cong., i Sess., Report of Secy, of Treas., 495.
MEdwards Papers, 156.
"Letter of Caldwell to Edwards, in ibid., 158.
375] THE TERRITORIAL BANKS 17
was deemed advisable. A few weeks later, Edwards made
an announcement of his resignation through the news-
paper columns, but assured the public that the Bank of
Edwardsville was in good condition and under careful
management. As proof of the bank's soundness, he stated
that the amount of specie on hand was more than twice
the amount of outstanding circulation, that none of the
directors had borrowed heavily, some of them not at all,
and that General Payne, the largest individual stockholder
had never asked for accommodation and had always urged
that the bank's affairs be conducted with the greatest
caution.38
The financial situation, however, was rapidly becom-
ing more serious. As a result of the failure of the Bank
of Missouri in September, 1821, a run was made upon the
Edwardsville bank by note holders from St. Louis and St.
Charles. The directors were warned the night before of
their coming and opened the doors of the bank at seven
the next morning, keeping them open until several hours
after closing time in the evening. This policy was con-
tinued for several days in the hope of restoring confidence
but the bank was soon compelled to suspend specie pay-
ments.39 President Stephenson immediately apprized Sec-
retary Crawford of the action and assured him that the
United States funds were amply secured.40 Secretary
Crawford designated Edward Coles, afterwards governor
of Illinois, to adjust the claim of the United States, but no
settlement was reached aside from the transfer in trust of
a large part of the bank's assets as security for the govern-
ment deposits.41
Little is known of the final settlement of the bank's
affairs save that the assets dwindled away and the United
States never recovered any part of the $46,800 on deposit
88U. S., H. of R., 18 Cong., i Sess., Doc. no. 133, pp. 85, 105, no.
128, p. 8.
39U. S., H. of R., 18 Cong., i Sess., Doc. no. 128, p. 9; Edwardsville
Spectator, August 21, 1821, September n, 1821.
40U. S., H. of R, 18 Cong., i Sess., Report of Secy, of Treas., 560.
rf., 566.
18 THE DEVELOPMENT OF BANKING IN ILLINOIS [37(>
at the time the bank closed.42 Senator Edwards stated
that the assets which were set aside as security for the
deposit were at the time more than ample to reimburse
the government, but that Secretary Crawford, out of defer-
ence to the Johnsons and General Payne had delayed set-
tlement until the securities in trust had become worth-
less.43
In 1823 when a committee of the House of Kepre-
sentatives at Washington was investigating the question
of public deposits, Edwards was summoned to appear be-
fore it. In the course of his examination, he repeated his
charge against Crawford, adding that he himself had
warned Crawford long before the bank failed. The next
year he accepted the post of minister to Mexico and was
about to leave for that country when Secretary Crawford
sent to the House a stinging reply to the charge. He
denied that Edwards had given him any intimation as to
the bank's condition. Edwards immediately resigned his
appointment and preferred formal charges against Craw-
ford. A committee of the House made a thorough investi-
gation of the whole affair ; its conclusion was that "nothing
has been proved to impeach the integrity of the Secretary
or to bring into doubt the general correctness and ability
of his administration of the finances."44 They found that
the evidence sustained Edwards in his statement that he
had published in the newspapers his intention of with-
drawing from the bank, but there was no evidence that
either he or the receiver of public moneys ever informed
Secretary Crawford about the bank's condition. In fact,
since Mr. Stephenson, the receiver, was also the president
of the bank, the committee thought it but natural that he
should fail to warn Mr. Crawford that the bank was not in
first rate condition. The committee urged, however, that
the practice of appointing the presidents of depositary
banks to be receivers of public moneys be discontinued.
42£7. 5". Reports on Finances, 1829-36, p. 605.
*3Niles' Register, xxvi, 140 ff., 274, 290; Edwards, Life and Times of
Edwards, 135 ff.
44U. S., H. of R., 18 Cong., i Sess., Doc. nos. 128, 133; Niles' Regis-
ter, xxvi., 174.
377] THE TERRITORIAL BANKS 19
A charter almost identical with the one granted to the
Bank of Illinois was issued to the president, directors and
company of the Bank of Kaskaskia in 1818.43 Had the
bank been started earlier there is little question but that it
would have succeeded. As it was, even the ability and
integrity of its officers and its location in the principal
settlement and capital of the territory were not able to
neutralize the effect of the provision requiring that sub-
scriptions be paid in gold and silver coin. This require-
ment had been met a little over a year before by the stock-
holders of the Bank of Illinois, but the territory was now
on the eve of hard times so the Bank of Kaskaskia never
transacted business. As Justice Shelton puts it in his de-
cision in the case of the People vs. Lowenthal : "It issued
no paper money and it cannot be said to have defrauded
any man."46
The incorporators of the City and Bank of Cairo
undertook to launch a most pretentious enterprise on the
site of the present city of that name. With the idea of
founding a great metropolis they had become the owners
of eighteen hundred acres of land at the junction of the
Ohio and Mississippi rivers.47 They were required by the
charter to lay off the site into city lots which were to be
sold at one hundred and fifty dollars each. Fifty dollars
of this amount was to be devoted to building dikes and
levees and constructing public buildings, while the remain-
ing one hundred dollars was to be used as capital for a
bank.48 For this sum two fifty-dollar shares were to be
issued, one to belong to the purchaser of the lot and the
other to the company. When five hundred lots had been
sold, a stockholders' meeting was to be held and thirteen
resident citizens chosen as directors.49 The bank was to
begin the issue of notes as soon as the money for the lots
**Laws of Illinois, 1817-1818, p. 82.
4993 Illinois, 191. This same statement appears in Brown, History
of Illinois, 428, 429.
*7Laws of Illinois, 1817-18, pp. 72, 73.
"Ibid., 75, Section 7.
*°Laws of Illinois, 1817-18, p. 76-7, Section 7.
20 THE DEVELOPMENT OP BANKING IN ILLINOIS [378
was turned over to its officers. Since the patronage of the
bank would be too small to justify its location in the new
city for some time, it was provided that a banking business
could be transacted at Kaskaskia until the legislature saw
fit to "compel all business to be done in Cairo."30 The
bank charter proper was modeled after those granted to
the banks at Shawneetown and Edwardsville.
The bank, according to Governor Ford, never accepted
its charter; hence no subscriptions were received nor any
organization perfected.51 Nineteen years later (1837)
during the internal improvement excitement the old char-
ter was adopted by a new company of the same name.62
Its history will be taken up in connection with the banking
operations of that period. As for the project of founding
a city, the whole scheme vanished into thin air and Cairo
was settled some years later much as other settlements
are established.
But one statement of the condition of the Illinois
banks is available, namely, a composite balance sheet
issued by the secretary of the treasury in 1819, when both
institutions were in their prime. The statement shows
that only $140,910 had ever been paid in by the share hold-
ers. The remaining liabilities consisted of an outstand-
ing circulation of $52,021, government deposits to the
amount of $119,036.92, individual deposits amounting to
f32,568.60 and undivided profits to the extent of $2,994.49.
On the other hand, the loans and discounts amounted to
$206,694.32, almost as much as the capital stock, circula-
tion and private deposits combined. This indicates to
how small an extent deposit banking was practiced. The
deposit by the government of the proceeds from the sale
of public land provided the banks with an unusually large
supply of specie ($74,715.51), large amounts of which had
to be conveyed on short notice to the Louisville and New
Orleans branches of the United States Bank. The
$59,332.18 due from other banks was probably largely
*°Laws of Illinois, 1817-18, 76, 81, Section 22.
"Greene and Thompson, Governors' Letter-Book^, ii, 60.
"Ibid.
379] THE TERRITORIAL BANKS 21
made up of the notes of these banks deposited by the re-
ceivers of public moneys. The remaining assets consisted
of $6,614 invested in securities and $175 in real estate.
The presence of such relatively large amounts of gov-
ernment funds produced a somewhat abnormal condition
and prevents one from ascertaining the real character
of Illinois banking at this period.53
A review of the conditions which prevailed in Illinois
during the existence of the two banks may serve the two
fold purpose of accounting more fully for the brevity of
their existence and the subsequent unpopularity of all
moneyed institutions. The commerce of the community
was still practically undeveloped on account of the self-
sufficient character of the life and the lack of means of
communication with the outside world. A bank, there-
fore, was looked upon as a mill for grinding out paper
money on easy terms for speculators. The public lands
were sold at two dollars an acre, eighty dollars to be paid
down on each quarter section and the remainder spread over
a period of four years.54 According to Governor Ford,
everyone who could borrow eighty dollars worth of the
banks' paper invested it in land with the hope that he
could sell it at a handsome profit to a "tenderfoot" before
the obligation to the bank fell due.55 Consequently when
the depression of 1819-20 spread over the West, it left
disaster in its wake. The failure of the banks in Ohio.
Kentucky and Missouri left the people of Illinois with a
quantity of worthless paper on their hands. Nearly every-
one was hopelessly in debt and his lands liable to seizure
by the federal government.56 The Illinois banks in order
to protect themselves at first merely resorted to suspen-
sion of specie payment but finally were compelled to close
their doors. In view of such a situation, therefore, it is
surprising that they made so creditable a showing as
they did.
53U. S., H. of R., 16 Cong., i Sess., Doc. no. 86, facing p. 40.
"Laws of the U. S., 6 Cong., i Sess., Ch. 55, Sec. 5.
"Ford, History of Illinois, 43; Wildman, Money inflation in the
United States, 68.
86Ford, History of Illinois, 44.
CHAPTER III
BANKING A STATE MONOPOLY.
When Illinois was admitted to the Union in 1818
the following provision was incorporated in her constitu-
tion: "There shall be no other banks or money institu-
tions but those already provided by law, except a state
bank and its branches which may be established and regu-
lated by the general assembly of the state as they may
think proper."1 The principal influences underlying the
insertion of this provision probably were: (1) The state
of Indiana had adopted a similar course just two years
before;2 (2) Experience with the paper of irresponsible
private banks had already engendered considerable feeling
against a further resort to that means of supplying the
people with a circulating medium. The conviction that
note issue could be entrusted only to the state prevailed
in spite of the disastrous results that have attended similar
experiments in the past.3
It will be noted that the constitution permitted the
banks chartered by the territorial legislature to continue,
but as has been seen they soon went out of existence and
left the field clear for the experiment of state banking.
Much of the future banking policy of the state de-
pended upon the interpretation to be given to the term
"state bank." When the question arose in 1834, the editor
of one of the leading newspapers made an unsuccessful
search for the records of the constitutional convention
of 1818 in order to ascertain the ideas of the members as
to what really constituted a "state bank." He was able,
however, to interview several survivors of the convention,
all of whom were of the opinion that the constitution was
1Article viii, Section 21.
Constitution of Indiana, 1816, Article x, Section I.
8Davidson and Stuve, History of Illinois, 305.
22
381] BANKING A STATE MONOPOLY 23
intended to delegate to the general assembly the power
to establish an institution under state control but not
necessarily owned by the state. They merely desired to
stop the chartering of any more banks that would not
be responsible to the state for their good conduct.4
This was evidently the interpretation put upon the
banking clause of the constitution by the first state legis-
lature, for they chartered a state bank half of whose stock
was to be sold to private individuals. Notwithstanding
the fact that the bank could begin business when it had
received fifteen thousand dollars in specie,5 this amount
was not subscribed and two years later the legislature
repealed the charter.6 As we have already seen, the year
1819 was a very unpropitious time for attempting to
launch any enterprise which required specie payments.
However, a brief review of the provisions of the
act may be of value in throwing light upon the ideas of
our early lawmakers as to the kind of bank that would
best meet the conditions that confronted them.
The parent bank was to be established at the seat of
government and removed whenever it was removed.7 Two
million dollars worth of shares was open to individual
subscription and a like amount was available for the state
whenever the legislature felt justified in making the neces-
sary appropriations. The liabilities of the institution
other than capital were never to exceed two million dollars.
The senate and house of representatives by joint ballot
were to choose six of the twelve directors. No judge or
member of the legislature could serve as director.8 Ten
per cent of the stock was to be paid for in specie or its
equivalent.9 If the bank refused to redeem its obligations
in specie on demand, a penalty of twelve per cent interest
was added to the amount of the obligation.10
*Sangamo Journal, January 25, 1834.
*Laws of Illinois, 1819, p. 151 ff., Section 5.
*Ibid., 1821, p. 93.
''Ibid., 1819, p. 151, ff., Section i.
*Ibid., Section 3.
9Ibid., Section 4.
rf., Section 5.
24 THE DEVELOPMENT OP BANKING IN ILLINOIS [382
The legislature evidently soon recognized the hope-
lessness of expecting the bank to accumulate the required
amount of specie so it supplemented the charter during
the same session at which it was passed by providing that
in paying for bank stock, the state auditor's warrant
should be considered as good as specie.11 But even this
inducement failed to effect the desired result. In the mean-
time there set in the general collapse of banks and other
business enterprises, described in connection with the dis-
cussion of the territorial banks. So utterly hopeless was
the condition of the people that a clamor for government
aid arose.
Notwithstanding the vigorous message of Governor
Bond in which he pointed out the folly of establishing a
bank for the sole purpose of relieving individual distress,
a bill was introduced in the next legislature for the estab-
lishment of a bank based wholly on the credit of the state.
One would suppose that the mere suggestion of being able
to borrow from the state upon easy terms sufficient cur-
rency to tide over the hard times would meet the un-
qualified approval of a community hopelessly in debt.
But the opposition to the scheme was not solely on the
part of the group of enlightened and disinterested legis-
lators who contested the measure every step of the way.
Mass meetings were held to protest against the adoption
of the project.12 At a meeting of the citizens of Bond
County it was resolved that "the legitimate object of bank-
ing institutions is to afford a safe and convenient medium
for the emission of loans founded on solid capital and not
a project of needy individuals for the creation of funds;
that whenever the emission of paper by any banking
institution does not depend upon the ability to redeem it
promptly in specie the community can have no assurance
that it will not be extravagant, and no reasonable hope
11 Laws of Illinois, 1819, p. 299.
12Edwardsville Spectator, February 13, 1821. The action taken by the
citizens of Crawford, Randolph and Gallatin counties was embodied
in resolutions and forwarded to the legislature. House Journal, 1820-21,
p. 227.
383] BANKING A STATE MONOPOLY 25
that it may ever be redeemed." It was further urged that
such an act would be unconstitutional in that it would
impair the obligation of contracts.13 On the other hand,
the passage of the measure was urged on the ground that
it is the duty of the state in time of great pecuniary em-
barrassment to afford such measure of relief to prevent
the "unnecessary and wanton sacrifices of the property
and possessions of the citizens of the state."14
The bill, however, passed both houses by a very close
vote after its discussion had consumed a fourth of the
time of the session.15 Governor Ford cites the election of
its sponsor, Richard M. Young, to the United States senate
as one of the many examples in the history of the state
of the forgiving nature of the people in the case of men
who have been active in the passage of harmful legis-
lation.16
The constitution of 1818 required that all bills receive
the approval of the council of revision which was com-
posed of the governor and the judges of the supreme court.
When the act in question came before the council it re-
ceived a unanimous veto and was sent back to the House
for further consideration.17 The note accompanying the
rejected measure gave as the reason for the unfavorable
action that the State of Illinois had no right to establish
a loan office scheme in the face of the prohibition in the
federal constitution against the emission of bills of credit.18
It had been decided that a bill payable on demand out
of a specified fund was not a bill of credit, but the council
held that bills of a state payable at some future time were
clearly not included in the meaning of that decision and
therefore came under the ban of the United States con-
stitution. They further justified their veto with the pre-
13House Journal, 1820-21, p. 227.
14Mass meeting of the citizens of Madison County. Edwardsvillt
Spectator, March 20, 1821.
16Niles' Register, xx, 48.
16Ford, History of Illinois, 46.
17 1 bid.
18Article I, Section x.
26 THE DEVELOPMENT OF BANKING IN ILLINOIS [384
diction that a train of evils would follow the adoption of
the bank measure. They urged that some other means
be found to relieve the popular distress than the issue of
notes which would not circulate in interstate commerce
and would not provide a satisfactory medium of exchange
even at home.19
In the house of representatives the bill and objections
were referred to a committee which recommended the
passage of the bill over the council's veto. Their reply to
the objections of the council was : ( 1 ) A bank note issued
by a state bank was not a bill of credit because the state
'did not propose to make the notes legal tender; (2) The
•council signed the bill creating a state bank in 1819;
•(3) Congress when it admitted Illinois to the Union ap-
proved her constitution even though it reserved banking
privileges to the state; (4) If other states did refuse to
receive Illinois paper the citizens of Illinois would have
more for their own use.20 When the motion to repass the
bill came before the House, Mr. McLean, the speaker, a
bitter opponent of the whole scheme, resigned the chair
in order to fight the bill because the rules forbade the
speaker to address the House and the friends of the bank
measure refused to go into a committee of the whole. He
was promptly re-elected, however, and the House went into
a committee of the whole in order to give him an oppor-
tunity to express his views. Notwithstanding the high
regard of the members for Mr. McLean and his eloquent
arguments in support of the council's position, the House
repassed the bill by a vote of seventeen to ten.21 Four of
the ten who opposed the measure framed a formal protest
against the action of the House and succeeded in having
it spread upon the records. The significant feature of
l9House Journal, 1820-21, p. 236. Edwardsville Spectator, February
13, 1821.
-°House Journal, 1820-21, p. 261 ff.
"Ford's account of this incident (History of Illinois, 46) does not
tally in every respect with the record of the proceedings of the legisla-
ture for February 6, 1821. House Journal, 1820-21, pp. 271 ff . ; Edwards-
•ville Spectator, February 13, 1821.
385] BANKING A STATE MONOPOLY 27
the document is its declaration that all banks are detri-
mental to the morals of the people and a menace to popular
liberty even when they are established upon a specie basis.
They laid the then-existing crisis in the United States at
the door of banks and predicted that the State Bank of
Illinois would become the tool of the political demagog
and the artful politician.22
On the same day the bill was forwarded to the senate
where it received just enough votes to pass it over the
council's veto.23 One of the eight men who gave their
votes for the measure immediately received the appoint-
ment of cashier of one of the branches of the bank,24 a
direct violation of the state constitution.25
The bill in its final form provided for the establish-
ment of the State Bank of Illinois at Vandalia, the new
state capital. The capital stock was not to exceed five
hundred thousand dollars and was to be owned entirely
by the state.28 The bank was to do business for ten years
and was permitted to hold property up to double the
amount of its capital stock.27 In order that no partiality
be shown to any section, branch banks were provided for
the towns of Edwardsville, Shawneetown, Palmyra,28 and
Brownsville.29 The state was then districted in such a
Z2House Journal, 1820-21, pp. 227-29.
23The Illinois constitution of 1818 (Article iii, Section 19) provided
that if after consideration the bill was approved in both houses by a
majority of all members elected, it became a law without the consent of
the council of revision.
24Alton Spectator, January 25, 1834.
"Article ii, Section 19.
2*Laws of Illinois, 1821, pp. 80 ff., Section I.
"Ibid., Section 2.
28This village, now deserted, was the first county seat of Edwards
County when the boundaries of the county extended to Canada. For
some years it was a thriving market town, but the location was so
unhealthful that it was finally abandoned. McDonough, History of
Edwards, Lawrence and Wabash Counties, 238.
29At this time Brownsville was the county seat of Jackson County
and contained a population of over five hundred, ranking next to
Shawneetown and Kaskaskia. However, the collapse of the state bank
and several other misfortunes caused the town to be abandoned. Illinois
State Historical Society, Transactions, 1905, p. 372.
28 THE DEVELOPMENT OF BANKING IN ILLINOIS [386
manner that every county was assigned to the principal
bank or one of the branches.30
The president and the six directors of the parent
bank and five directors for each of the branches were to
be chosen biennially by joint ballot of the two houses of
the legislature. In choosing the branch directors, how-
ever, proper geographical distribution must be made.31
The selection of all other officers was left to the respective
boards of directors. Although the state was the sole owner
and beneficiary of the enterprise, its total appropriation
for getting the institution under way was the two thous-
and dollars provided for the purchase of bank note plates.32
For the time being only three hundred thousand dollars
was to be printed and issued, the issue of the remaining
two hundred thousand being left to the will of the next
legislature.33
The denominations provided for were ones, twos,
threes, fives, tens and twenties. It was required that
every note should read : "The President and Directors of
the State Bank of Illinois promise to pay to or
bearer the sum of Dollars, agreeably to the
provision of the charter of this institution, with interest
thereon at the rate of two per cent per annum. Eeceiv-
able at all times for debts due the State or the Bank."34
As soon as the notes were ready they were distributed
to the bank and branches according to the population of
their respective districts. The banks were required to
deal with all persons alike.35 A borrower must apply
only to the bank in his own district and no one person
was to receive a loan of more than a thousand dollars. If
the amount of the loan exceeded a hundred dollars, pay-
ment must be secured by a mortgage on unincumbered
*°Laws of Illinois, 1821, pp. 80 ff., Section 4.
S1lbid., Section 5.
*2Ibid., Section 8.
3albid., Section 9.
**Ibid., All unauthorized issues of paper currency within the state
were forbidden under a penalty of $10,000.
**Ibid., Section 12.
387] BANKING A STATE MONOPOLY 29
real estate *worth at least twice the amount of the mort-
gage. Loans of a hundred dollars or less could be made
upon personal security approved by a two-thirds vote of
the directors present at the meeting at which the loan
was under consideration.30 A uniform interest rate of six
per cent was established for all loans.
The bank was made the sole depositary of the state's
funds and in so far as these funds consisted of specie or
its equivalent the bank could make them the basis of a
further note issue up to twice their amount. This issue,
however, must be redeemed in gold or silver on demand37
while the state allowed itself ten years to redeem the
regular issue, one tenth to be redeemed and retired an-
nually.38 The issue based upon state funds was forbidden
by an act of 1823, but the state in other ways continued
for ten years to misuse the funds granted to the common
schools by the United States.39 The bank was required
to show great leniency to its debtors. Their loans must
be considered standing accommodations renewable from
year to year if necessary, upon payment of ten per cent
of the principal.40
In order to safeguard the interests of the state the
branch banks were required to report semi-annually to
the principal bank and these reports were incorporated
in the biennial report of the bank to the legislature. Com-
mittees of the legislature were to be permitted to examine
the bank at any time.41
The original act provided that the president of the
parent bank should receive in lieu of a salary the right
to borrow two thousand dollars more than he could other-
wise have borrowed.42 But at the same session it was
provided that he should receive a cash salary of eight
3*Laws of Illinois, 1821, pp. 80 ff., Section 12.
37/&tW., Section 36.
3SIbid., Sections 23, 29.
39Sumner, History of Banking in All Nations, i, 157.
*°Laws of Illinois, 1821, pp. 86 ff., Section 14.
41Ibid., Section 17.
42Ibid., Section 18.
30 THE DEVELOPMENT OF BANKING IN ILLINOIS [388
hundred dollars instead of the extra accommodation at
the bank.43 However, branch presidents and directors
were granted additional loans of a thousand dollars and
seven hundred fifty dollars respectively.44 Cashiers were
to be paid a salary of not more than eight hundred
dollars.45
As was the case with the territorial banks the legis-
lature was forbidden by the federal constitution to make
the notes legal tender, but it sought to accomplish the
same end by the usual indirect methods, namely, making
the notes legal tender for all public dues within the state46
and providing that the execution of judgments should be
suspended for three years if the plaintiff were unwilling
to accept the state bank notes.
The legislature proceeded to elect the president and
directors of the bank and, in accordance with a supple-
mentary act of 1823, the cashier of the parent bank. The
bank began making loans in July, 1821, and everyone who
could offer the necessary security obtained his share of
the three hundred thousand dollars.47 According to Ford,
a large number of the bank's officers were members of the
legislature48 and all of them professional politicians who
were then, or expected to be, candidates for office so they
were unwilling to risk their popularity by a too close
scrutiny of the kind of security offered. Moreover, they
were merely the agents of a state lending her credit to
her indigent citizens and felt no keen sense of personal
responsibility.49
*3Laws of Illinois, 1821, 144.
"Ibid., Section 18.
4SIbid., Section 19.
MIbid., Section 9.
"Edwardsville Spectator, July 3, 1821. In the same newspaper in its
issue of August 14, 1821, is an account of the meeting of the directors of
the Edwardsville Branch at which the entire share of the district, more
than $80,000, was loaned upon personal security in sums of $100 or less.
48The names of the president and directors of the bank are given in
the House Journal (2 Sess., i G. A.) 68. None of the persons mentioned
in this list was a member of the general assembly.
49Ford, History of Illinois, 47. Article on Illinois by W. H. Brown,
in Chicago American, December 25, 1840.
389] BANKING A STATE MONOPOLY 31
As far as the larger transactions were concerned, the
new bills for a time supplied the demand for a circulating
medium, but there was still no provision for small change.
Minor coins were as scarce as those of larger denomina-
tion; hence the practice arose of tearing the bank notes
into halves, quarters, etc., in order to make change.50 This
practice received the official sanction of the bank in 1823
when its directors authorized the tearing of all notes of
five dollars or less denomination and offered to receive
portions of notes in payment of all obligations to it.51
The members of the general assembly believed that
the bills of the bank would be on a par with gold and
went so far in this belief as to pass resolutions calling
upon the treasury department at Washington to accept the
Illinois bank notes as the equivalent of specie.52 Accord-
ing to Ford's oft-quoted account, when the matter came
to a vote in the state senate, Lieutenant-Governor Menard,
a shrewd old French pioneer, put the motion as follows:
"Gentlemen of de Senate, it is moved and seconded dat de
notes of dis bank be made land office money. All in favor
of dat motion say 'aye.' All against it say 'no.' It is.
decided in de affirmative. And now gentlemen, I bet you
one hundred dollars he never be made land office money. "5a
It was not long until the dire prediction of those who
had opposed the establishment of the bank began to be
fulfilled. The notes which never were accepted on a par
with gold soon began to depreciate still further and in a
few weeks after the bank opened were quoted at seventy-
five cents on the dollar.54 A month later they had reached
sixty-two and one-half cents55 and kept on sinking until
1823 when they remained at about thirty cents until 1825.5ft
60Illinois Intelligencer, March 15, 1823; Ford, History of Illinois, 47.
^Illinois Intelligencer, March 15, 1823.
"Ford, History of Illinois, 45.
54W. F. Baker, in Bankers Magazine, ix, 12.
••'•Advertisements in the Edwardsville Spectator, October 16, 1821.
"Article by W. H. Brown, in Chicago American, December 25. 1840.
The editor of Niles' Register (xxiv, 342) reports having received a sub-
32 THE DEVELOPMENT OF BANKING IN ILLINOIS [390
After that year there was a rise in value due to the adop-
tion by the state of measures which will be considered at
a later stage.
Several causes contributed to this utter failure of the
notes to maintain their standing in the eastern money
market. In the first place, no provision was made for the
redemption of the notes in specie on demand. The parent
bank received some specie for a time, most of it as the
depositary of state funds received from the federal gov-
ernment. But aside from this limited amount not a dollar
in specie wras paid into the treasury.57 When upon one
occasion one of the branches received two dollars in specie
from a customer they were placed upon exhibition as
curiosities.58 The loss of its building and fixtures in
January, 1823,59 by fire compelled the parent bank to keep
its specie in a box fastened with a padlock. In March of
the same year, robbers broke into the temporary quarters
of the bank and carried off $4,200, "a large part of its
specie."60 From these bits of evidence it can readily be
seen that the bank was in no position to maintain its notes
at a parity with gold.
In the next place, the bank's debtors failed to take the
right attitude towards their obligations. The Edwardsville
Spectator soon after the first loans were made in that dis-
trict complained that the greater part of the borrowers
instead of paying their honest debts squandered the money
for "purposes worse than useless."61 They looked upon the
issue as a gift from the state which could be paid back or
not as they saw fit.62 Other borrowers of the bank's notes
eased their consciences with the assurance that the notes
were bills of credit and therefore the whole scheme was
scription from an Illinois gentleman who complained that it cost him
twelve dollars in Illinois currency to obtain the five dollars in United
States money inclosed.
"Edwards, Life and Times of Edwards, 207.
58Baker, in Bankers Magazine, ix, 12; Brown, History of Illinois, 433.
^Illinois Intelligencer, February I, 1823.
*°Ibid., March 29, 1823.
61December n, 1821.
82Ford, History of Illinois, 47.
391] BANKING A STATE MONOPOLY 33
unconstitutional.63 The question was taken into the courts
and a decision was rendered by the supreme court of Illi-
nois in 1826. It was decided that the borrower of a bank's
paper cannot be released from his obligation by raising the
contention that the bank's charter is unconstitutional.6*
The court ignored the real issue of the constitutionality of
the bank's paper until 1833, two years after the expiration
of its charter. It was then held that a promissory note
given in consideration of such bills is void and cannot be
collected by law.63 If this latter decision had come some
eight or ten years earlier it would probably have placed the
state in an even more embarrassing position than the one
it was forced to occupy until it had settled the bank's
affairs.
In the third place, the series of ultra-liberal measures
granting relief to debtors complicated the financial situa-
tion in the state. We have already noted the provision in
the bank's charter granting a stay of execution where the
plaintiff refused to accept bank notes from the debtor. At
the same session, the legislature added the provision that
even if the plaintiff did signify his willingness to accept
state currency, the defendant could have a replevin of sixty
days. The execution of all contracts calling for gold and
silver was stayed from one to five months according to the
amount of the debt. All judgments of justices of the peace
could also be stayed for thirty days. These measures,
while on their face either of no significance to the bank or
else actually showing favor to its notes, still did a great
deal to engender a spirit of disregard of the sacredness of
one's obligations. The bank undoubtedly lost far more
from the prevalence of this spirit than it gained from the
favor shown its notes. The great depreciation of the
bank's notes ought in itself to have afforded sufficient
relief to debtors but the legislature in 1825 granted further
aid to that class by making the warrants of the state audi-
83Edwards, Life and Times of Edwards, 175.
"Snyder vs. President and Directors of the State Bank, Breese, 161.
fl5Linn vs. President and Directors of the State Bank, I Scammon 87.
34 THE DEVELOPMENT OF BANKING IN ILLINOIS [392
tor receivable at the bank.66 With the appreciation of the
bank's notes referred to above, began another series of re-
lief laws which will be dealt with in another connection.
Lastly, when we consider that the bank had twenty-
six directors, each of whom was entitled to a loan of seven
hundred fifty dollars in addition to his individual borrow-
ings, and four branch presidents, each entitled to addi-
tional loans of a thousand dollars, we can readily agree
with Governor Edwards' view of the situation. In his
inaugural message of 1826, Governor Edwards pointed out
to the legislature that the bank's officers had borrowed
"to the full limit of the law and thus became more in-
terested than any other class in the community in im-
pairing the credit of the institution and depreciating its
notes, as the means of facilitating- the discharge of the
debts they had contracted with it." They felt that there
was no need of paying obligations which could eventually
be shifted upon the whole community in the form of state
taxes.67 By borrowing to the full limit allowed individuals
in addition to their accommodation as directors, these
men were enabled to divert $53,500, or more than one
sixth of the total issue of notes, to their own selfish ends.
In some cases they transferred their right to borrow to
their friends, thereby enabling them to exceed the lawful
loan limit.68
It is little to be wondered at, therefore, that the whole
venture was doomed to failure from its very birth and
that but two years after its inception, state bank notes
were quoted at but thirty cents on the dollar.
The effect of the depreciated notes was now so keenly
felt that both friends and foes of the original project
united in asking the next legislature, to which had been
left the option of issuing an additional two hundred thous-
and dollars, not to exercise this privilege. The bill which
sought to provide such an issue was accordingly defeated
"Laws of Illinois, 1824-25, p. 84.
«7Message of Governor Edwards, Senate Journal, 1826-27, p. 54.
"Ibid.
393] BANKING A STATE MONOPOLY 35
in the lower house by a vote of nine to twenty-four.69 The
few friends of the measure then attempted to secure the
adoption of a resolution providing for the submission of
the question to the people at a special election; but this
project met a like fate.70 A number of measures calcu-
lated to remedy the whole situation were introduced, but
no action of consequence was taken. In accordance with
a joint resolution of the two houses, a committee was ap-
pointed to investigate £he affairs of the bank and re-
ported: (1) that they had examined the papers and
cash of the principal bank and found that they tallied
with the annual report of December 11, 1822; (2) that
little satisfaction could be had in examining the books
of the branches on account of their poor bookkeeping and
failure to make reports; (3) that the different branches
should be required to obey the law in the matter of trans-
mitting regularly to the parent bank their share of the
one-tenth of the notes that was to be destroyed each year.
They recommended the creation of a responsible com-
mittee whose members would see to it that the retired
issue was actually destroyed. They expressed the opinion
that such a measure would restore public confidence in
the remaining notes.71 The legislature took little notice
of the report of the committee aside from the passage of
an act requiring the cashiers of the branches "to make
out and transmit to the cashier of the principal bank by
the first of January of each year a complete abstract of
their discount books for the year past." They reduced the
salary of the president of the principal bank to two hun-
dred dollars and increased the salary of the cashier to a
thousand dollars.72
When the next legislature met in December, 1824, the
necessity for action was so great that it could no longer
be ignored. Governor Coles in his message censured the
69Illinois Intelligencer, January 4, 1823.
70Alton Spectator, February 11, 1834.
11House Journal, 1822-23, p. 108; Illinois Intelligencer, January 11,
1823.
12Laws of Illinois, 1822-23, p. 181.
30 THE DEVELOPMENT OF BANKING IN ILLINOIS [394
legislature of 1820-21 for its hasty action in interpreting
as the pressure of the times a condition which was largely
the result of excessive issues of paper. But now that
the evil had been done, he recommended the strictest
publicity of all the bank's accounts and the passage of
such measures as would expedite the speedy dissolution
of the bank upon the expiration of its charter without loss
to the state.73 Accordingly a law was enacted providing
for the appointment of three commissioners to make a
thorough examination of the Shawneetown branch bank,
whose officers seem to have been under suspicion.74
The act further instructed the cashier of this branch
to deliver to the cashier of the main bank the whole amount
of the ten per cent fund which was supposed to be retired
and destroyed every year. A penalty of $1000.00 was
provided if the cashier or other officers hindered the work
of the commissioners.75 A joint committee appointed to
ascertain the condition of the whole institution revealed
the fact that thus far the expenses of the principal bank
had exceeded its discounts by $2,403.90. The Browns-
ville branch had also been run at a loss, but the Edwards-
ville and Palmyra branches each had a small balance.
The Shawneetown branch had been conducted in so loose
a manner that it was impossible to ascertain its true condi-
tion. The cashier had made a loan of $3750 without
security and was unable to account for $4800 additional.76
The legislature took no immediate action against the
Shawneetown officers but three months later by joint
resolution it authorized Governor Coles to appoint a
competent accountant to make a thorough examination of
the books.77 This appointment was made and the affairs
of the bank carefully investigated, but the books were in
"Governor's message, 1824.
7tLaws of Illinois, 1824-25, p. 16, Section i.
~*Ibid., Section 2.
76Knox, History of Banking in the United States, 716; House Journal,
1824-25, p. 203 ; Senate Journal, 1824-25, p. 217.
''''Laws of Illinois, 1824-25, p. 185.
395] BANKING A STATE MONOPOLY 37
such unintelligible shape as to throw little light upon the
bank's real condition.78
So involved were the members of the legislature and
their friends in the affairs of the bank that no action re-
sulted directly from either investigation.79 In the mean-
time, however, a reform act was passed supplementary to
the act establishing the bank. It provided that the cashier
of the principal bank should collect all notes as soon as
possible and all those not yet signed and proceed to burn
them in the public square at Vandalia in the presence of
the governor and judges of the supreme court.80 There-
after when the treasurer of the state paid out a bank note
it was to bear the stamp "re-issued" and no interest could
be collected by the holder.81 Cashiers of the branches were
required to forward semi-annually for retirement and
burning all notes repaid by borrowers except a small sum
for current expenses.82 The offices of president and di-
rectors were abolished in the case of all the branches and
78The following report of the examiner, taken from the Illinois
Intelligencer of June 17, 1825, is of interest in showing upon what a costly
enterprise the state had ventured :
Liabilities :
Original note issue $ 84,685.00
Discounts earned and loans repaid 15,547.68
$100,232.68
Assets :
Unpaid loans
renewed $ 40,321.07
bad debts „ _ 31,969.60
Expenses of branches 5,497-90
Notes returned to principal bank 19,947.00
Two per cent interest to note holders 903.61
$ 08,638.18
Upon being questioned by the examiner as to the failure of his state-
ment to balance the cashier explained that he would be able to show
auditor's warrants and bank notes to cover the deficiency.
79Ford, History of Illinois, 65; Reynolds, My Own Times, 173.
*°Laws of Illinois, 1824-25, p. 82, Section I.
8llbid., Section 2.
*-Ibid., Section 3.
38 THE DEVELOPMENT OF BANKING IN ILLINOIS [396
only the cashier was left to collect the debts and renew
loans. The cashier of the principal bank was placed under
a fifty thousand dollar bond and the cashiers of the
branches under a thirty thousand dollar bond in order
to protect the state from further loss on account of their
careless bookkeeping or embezzlement of funds.83 There-
after a cashier could be removed by the governor at
pleasure and satisfactory evidence had to be given before
May 1, 1825, that all five of the cashiers were not de-
faulters and that they had faithfully discharged the duties
of their respective offices.84 To facilitate the destruction
of notes, auditor's warrants were made legal tender at the
bank which exchanged them for notes held by the state
treasurer.85 Five days after the act was signed the bank's
officers in the presence of the governor and the supreme
court destroyed $75,000 worth of notes, one fourth of the
entire issue.86
Governor Coles was keenly alive to the necessity of
improving the bank's condition and his letter book bears
testimony to his vigilance in enforcing the bank laws.87 In
a letter to the cashier at the Shawneetown branch he states
that the well being of the bank demands a most rigid
enforcement of the letter of the law. He warns the official
in question that if any further violation of the law occurs,
"a very few days will be permitted to pass" before he will
exercise the authority vested in the governor by dismissing
the offender from office. In the examination of the
Shawneetown branch referred to above, the accountant
found that the cashier credited himself with a generous
fee whenever he protested a note. Governor Coles demanded
that reparation be made to the principal bank and that
all the bank notes that had accumulated during the six
months period be forwarded promptly to the principal
bank for retirement.88
*zLaws of Illinois, 1824-25, p. 82, Section 4.
**Ibid., Section I.
85/fru/., Section 7.
MIllinois Intelligencer, January 21, 1825.
87Greene and Alvord, Governors' Letter Books, \, 76-82, 89.
"Ibid., 89.
397] BANKING A STATE MONOPOLY 39
On June twenty-third after the branches had sent in
their notes, a second "purification by fire"89 of the notes of
the bank occurred in which eleven thousand dollars worth
was destroyed. Within two weeks the specie value of the
outstanding notes increased about five cents on the
dollar.90 By December twentieth when the next semi-an-
nual destruction of notes occurred the total amount out-
standing had been reduced to less than two hundred thous-
and dollars.91 From this time the appreciation of the
notes continued with the progress of their retirement.92
At the close of Governor Coles' administration a year
later, they were rated at seventy-five cents on the dollar.
Governor Coles continued his unrelenting vigilance
over the bank up to the very close of his administration.
Just before the opening of the next general assembly in
December 1826, he sent a lengthy questionnaire to the
cashiers of the bank and branches with a view to obtaining
data for the use of the legislators,93 but the result was a
great disappointment. The cashier of the principal bank
answered the questions in a very unsatisfactory manner.
The Shawneetown cashier had recently died and his admin-
istrator had refused to turn over the property of the
branch to the new appointee. The other branches fur-
nished sufficient information in addition to that received
from the principal bank to give a general idea of the condi-
tion of affairs. The four districts in question had loaned
$215,000. Of this amount, f 109,615 had been repaid, while
the remainder might be repaid within the allotted five years
or might have to be abandoned as uncollectible. The
•expenditures for operation had consumed $43,820, an ex-
cess of $11,000 over interest earned.94
In his farewell message, Governor Coles gave some
Tery sound advice which the legislature would have done
89Niles' Register, xxix, 326.
^Illinois Intelligencer, June 24 1825.
91Niles* Register, xxix, 326, 369.
^-Chicago American, December 25, 1840.
03Greene and Alvord, Governors' Letter Books, i, 107.
**Senate Journal, i Sess., 1826-27, p. 22.
40 THE DEVELOPMENT OF BANKING IN ILLINOIS [398
well to heed, but which, as we shall see, was soon for-
gotten. He urged them not to increase the already great
embarrassment of the state's finances by the enactment
of measures for the further relief of the already pampered
debtor. He advocated a policy of non-interference with
the bank, aside from providing for a simple effective system
for the settlement of its affairs. Finally, he pointed but
the fact that a speedy termination of the whole enterprise
was the only protection against a total loss to the state
from the deterioration of the bank's assets.95
From the very beginning the state bank proved to be
a serious burden to the state's finances. The state's annual
revenue amounted to about $25,000 and was derived almost
wholly from the land held by non-residents in the region
still known as the military tract, lying north and west of
the Illinois Kiver. The residents of the state paid their
taxes to the counties every year, while the state collected
from the non-residents only every other year.96 As early
as 1822 the state auditor had pointed out that some
measure should be adopted for the relief of public officers
who were receiving their salaries in bank paper at par
and paying for goods at a discount of more than fifty per
cent. He contended that the non-resident taxpayer met
but half of his real obligation to the state by paying in
bank notes and furthermore he escaped all the attendant
currency ills which a resident was compelled to suffer.97
Thus it can be seen that the depreciation of state paper,
while it decreased the real revenue on one hand, caused
an increasing clamor for a greater expenditure on the
other. As this was a matter that concerned the members
of the general assembly in a personal way, prompt action
was taken upon the auditor's suggestion. Six weeks later,
an act had been passed and approved appropriating nine
dollars a day each to the speakers of the two houses in
place of the usual per diem of five dollars.08 Each senator
9*Senate Journal, i Sess., 1826-27, p. 22.
"Ford, History of Illinois, 47. This was regarded as a great injustice
to the residents of the state.
97 Laws of Illinois, 1822-23, p. 227.
9*Ibid., 164, Section 2.
399] BANKING A STATE MONOPOLY 41
and representative was required to write on a slip of paper
the sum he was willing to accept provided it did not exceed
seven dollars per day. The previous compensation had
been three dollars and a half. As for other state officers,
the auditor was instructed to allow them fifty per cent
more than the constitution specified."
Since the available fund of bank notes in the treasury
was not sufficient to meet more than half of the state's
current obligations the auditor was authorized to issue
his warrant bearing six per cent interest for the rest.100
The notes and warrants circulated side by side, both de-
preciating until in 1825 the legislature was compelled to
make further provision for public officers. Accordingly
the appropriation bill of 1825 provided that a committee
consisting of the treasurer, the secretary of state and the
cashier of the principal bank should determine at the be-
ginning of each month the rate at which the treasurer
should pay out warrants and notes during the ensuing
month. For the time being the auditor was instructed
to rate the notes of the bank at three dollars for one in
specie.101 In other words, the state was borrowing money
at the rate of two hundred per cent interest. The result
was that the ordinary expenses of about $30,000 were in-
creased threefold without any increase in income.102 The
gap that was made by the destruction of bank notes was
soon more than filled by warrants. In a way it would
have been better to have retained the notes, for they cir-
culated more freely and their expense to the state was
less. Furthermore, the issue of $107,000 in warrants in
a single year served to keep down the value of the notes.
The warrants as well as the bank notes were eagerly seized
upon by non-residents and speculators for the purpose of
paying their state taxes.103 Notwithstanding this handi-
"Laii's of Illinois, 1822-23, J66, Section 6.
100Ibid., Section 7.
101 Laws of Illinois, 1824-25, p. 182.
102Ford, History of Illinois, 48 ; Edwards, Life and Times of Edwards,
203.
103Ibid., 213-15.
42 THE DEVELOPMENT OF BANKING IN ILLINOIS [400
cap, however, the attendant increase in the value of the
bank's paper following the retirement of the $100,000
indicated that the destruction of the notes had engendered
a feeling of confidence in the state's integrity. The legis-
lature demonstrated its optimism by the passage of an act
which provided that the rate at which state paper should
be paid out after February 17, 1827, was to be determined
by the same committee that had been performing this
service, but that they should hold only quarterly meetings.
They were instructed to continue this duty until March,
1830. At each meeting they were to decrease the treasury
discount on the notes by at least two and one-half per
cent. At this rate, by March, 1830, the notes would be paid
out of the treasury on a par with gold.104
The Illinois courts had been given to an arbitrary
scaling down of the debts of individuals against whom
the bank had obtained judgment. This practice was
ordered discontinued. Thereafter, in cases where judg-
ment was rendered, the defendant could elect to pay
specie or bank notes. If he chose the former his debt was
reduced to the actual specie value of state bank notes;
otherwise he must pay the whole amount of the face of the
judgment. The same option was granted to persons who
purchased property sold by the bank to satisfy a judg-
ment.105
The resignation of Senator Edwards to accept the
position of minister to Mexico had left a vacancy for
the next legislature to fill, but before it assembled Edwards
had resigned his post and engaged in the controversy de-
scribed in connection with the Bank of Edwardsville.
Upon the convening of the general assembly he announced
his candidacy for his former seat in the United States
senate. But his hostility to banks had aroused the opposi-
tion of a number of influential men in addition to his old
political enemies and he was defeated. Shortly after-
wards he announced his candidacy for governor on an
anti-bank platform. With a comparatively unknown
10*La-u.'S of Illinois, 1826-27, p. 82.
lozRez'ised Code, 1829, p. 164.
401] BANKING A STATE MONOPOLY 43
opponent and a long record of public service Edwards had
the advantage from the start. He traversed the state from
end to end, attacking the bank and everyone connected
with it. He accused its officers of mismanaging its affairs
and of employing methods of business that were a menace
to the public welfare. The record of the legislature in the
field of bank legislation was subjected to a storm of criti-
cism and baleful consequences of the whole undertaking
were pictured to his audiences of backwoodsmen. Edwards
was elected by a plurality of five hundred votes, but the
legislature continued to be dominated by his enemies.106
In his inaugural address107 to the legislature Governor
Edwards gave a lengthy review of the history of the state
bank and the effect of its paper upon the community. But
he considered the note issue itself of minor importance as
a cause of the deplorable conditions that prevailed. It
was his belief that the constant interference by the legis-
lature between debtor and creditor, as well as the lavish
increases in salary voted in the face of an empty treasury
were responsible for most of the difficulty. He admitted,
however, that the existing state of affairs was not entirely
due to unwise legislation, and recognized the natural
scarcity of sound currency in pioneer communities and
the heavy purchase of public land as contributory causes.
On the whole, the address gives an adequate and fairly
accurate picture of the conditions that confronted the
new administration. But Edwards was not content to
stop at this point. He proceeded to berate the officers
of the bank for "gross fraud and imposition, aggravated
by the clearest moral perjury." He considered past in-
vestigations as generous applications of white wash and
urged the legislature to exercise its right of impeachment
and trial of the delinquent officers.
The more or less general charges contained in the
governor's message were followed by specific indictments
contained in several special messages. The purport of
100Ford, History of Illinois, 64; Edwards, Life and Times of Edwards,
209-12.
107Senate Journal, 1826-27, pp. 46 ff.
44 THE DEVELOPMENT OP BANKING IN ILLINOIS [402
these messages was that the late president, directors and
cashier of the branch bank at Edwardsville had been
guilty of a violation of the state bank act of 1821. William
Kinney, a prominent political opponent of Edwards, was
accused of mismanaging the affairs of this branch while
on the board of directors. The principal charge against
him was that he was involved in the loan of $2000 made
upon a piece of real estate which upon execution was
valued at $737 and disposed of for $500. It will be remem-
bered that the law of 1821 provided that no loan on real
estate should be made unless the property was worth
double the amount of the loan. The loan, according to
Edwards, was made for the purpose of buying a printing
press with which to conduct the fight for the adoption of a
pro-slavery amendment to the state constitution.108
Other charges were brought by Edwards against
Judge Smith, the cashier of the branch. Smith was ac-
cused by the governor of having violated every provision
of the bank's charter dealing with the lending of the notes,
and of showing the grossest partiality and carelessness
in handling the payment of loans. Judge Smith was a
politician of considerable ability and succeeded in uniting
the opponents of Edwards so effectively that the committee
appointed to investigate the charges were favorable to
the accused officials from the start. The evidence shows
that the branch had been run in a very reckless manner,
to say the least. Its officers had so many political alliances
that they were forced to show partiality in their handling
of the bank's business. After the committee had made a
lengthy examination of witnesses and papers and reported
favorably to the accused, the House resolved that no
evidence had been presented against the accused officials
which would "justify the belief that they acted corruptly
and with bad faith in the management of said bank."109
During the same session the governor attacked the
cashier of the principal bank in a message which contained
nine specific instances of violation of the state law. In
106House Journal, 1826-27, pp. 409-11, 418, 459-61, 504 ff.
10»Ibid., p. 595.
403] BANKING A STATE MONOPOLY 45
this message, be made the further charge against Judge
Smith that he still had in his possession unlawfully a
large part of the bank's cash. These charges were like-
wise referred to a committee which took action similar to
that in the Edwardsville case.110 In the meantime, a joint
committee appointed to examine the state bank, count
its money and find out if the "retirement clause" was be-
ing fulfilled reported that the affairs of the bank were
being "properly and correctly managed/'111
Edwards afterwards retracted some of the statements
he had made about prominent bank officials, but continued
his hostility to banks during the rest of his term.1 12
His letter book during this period is largely filled with
demands for information as to illegal acts done accompa-
nied by threats of removal from office. These letters were
regarded as the attacks of a personal enemy rather than
the official acts of a chief executive.113 Edwards was
especially anxious to obtain any information that could
be used against his enemies in the legislature and in one
letter requests the auditor to prepare for him a list of the
members of the general assembly who have failed to meet
their debts to the bank together with the respective
amounts.1 14
Notwithstanding the hostility of the legislature to the
Edwards policies and the relationship that existed between
its members and the bank, some progress was made toward
protecting the state's interests in the settlement of the
bank's affairs. The salaries of the cashiers of the principal
bank and branches were reduced to five hundred and four
•hundred state paper dollars respectively. Thereafter the
questionable practice on the part of bank officers of ap-
propriating large sums for current expenses was forbidden.
For all such expenditures a specific appropriation from the
legislature was now required.115 The president of the
ll°House Journal, 1826-27, 415, 416.
11 Senate Journal, 1826-7, 242-3.
112Knox, History of Banking, 718.
113Greene and Alvord, Governors' Letter Books, i, 116-24, I33-
"«/&«/., 120.
llsLaws of Illinois, 1826-27, p. 377, Sections i, 2.
4(> THE DEVELOPMENT OF BANKING IN ILLINOIS [404
state bank was no longer to receive compensation for
his services.110 The cashier was ordered to place all out-
standing promissory notes of less than one hundred dollars
in the hands of a justice of the peace.117 The small amount
of individual deposits was to be returned to the depositors
and thereafter none but state and school funds were to be
received. In order to protect the state's interest the
cashier of the principal bank was empowered to bid in
property sold by the bank for judgment if the other bids
were too low.118
On the other hand the appreciation of the state paper
to sixty or seventy cents led to a demand for further relief
to bank debtors. In spite of the fact that unreasonable
leniency had already been shown to this class and that any
further indulgence would delay the final settlement of the
bank's business and thus place a greater burden upon the
already embarrassed state treasury, a law for the relief
of debtors was passed. It provided that any debtor to the
bank who was in default of payment, even if judgment
had already been rendered, should be forgiven for his
past delinquency and allowed to renew his note or mort-
gage. However, he must agree to pay the back instalments
and interest and any court costs that may have been in-
curred.119 All courts were forbidden to issue executions
against bank debtors for three months after the passage
of the act.120 In case the proceedings against a bank
debtor had gone so far that the sheriff was about to seize
the property of the debtor upon an execution, the debtor
could by arranging with the bank for the renewal of the
obligation, compel the sheriff to return the writ, marked:
"Satisfied by the renewal of the debt to the bank by the
defendant."121 It was natural that such a trifling policy
on the part of the state should lead to an attitude of con-
*l*Laws of Illinois, 1826-27, p. 377, Section 3.
117Ibid., Section 4.
116Ibid., Section 5.
119/frid., Section i.
120Loa'j of Illinois, 1826-27, p. 376, Section 2.
121 Ibid., Section 3.
405] BANKING A STATE MONOPOLY 47
tempt on the part of the debtor. Accordingly, in spite of
a most earnest protest on the part of Governor Edwards,122
additional inducements were demanded and granted on
the ground that former measures had not been effective.
This time provision was made for the remission of all
interest if a debtor would sign, by September 1, 1829,
three new notes by which he agreed to pay his obligation
to the bank in three annual instalments, on the first of
May, 1830, 1831, and 1832, respectively. If instead of
signing the notes he chose to settle in full by September 1,
1829, he was to receive a discount of ten per cent and was
absolved from all interest. If he paid by July 1, 1830,
his interest was deducted but no further rebate was
given.123 The act also provided that as a step toward the
final settlement of the bank's business the office of cashier
of the principal bank be abolished and the state treasurer
made ex officio cashier. The work of collection was turned
over to the attorney general and the various states at-
torneys who received two and a half per cent on all col-
lections made.124
When the first of September arrived and it was seen
that the bank debtors were not taking advantage of the in-
dulgence granted them, Governor Edwards issued a procla-
mation announcing his intention to show no further mercy
in his prosecution of the state's claims.125
The same year (1829) Governor Edwards became in-
volved in another controversy with the treasury depart-
ment at Washington. The state was entitled to draw as a
school fund from the federal treasury three per cent of
the proceeds from the sale of public land in Illinois. The
secretary of the treasury became convinced that this money
was not being put to its intended use and ordered the an-
nual payment for 1829 to be withheld. Governor Edwards
was a strong believer in state's rights and resented any
interference on the part of a federal officer. Consequently
1 "Governor's message, 1828.
123Lotfj of Illinois, 1828-29, PP- 167-69.
124 Ibid.
125Greene and Alvord, Governors' Letter Books, i, 148, 149.
48 THE DEVELOPMENT OF BANKING IN ILLINOIS [406
he demanded the immediate payment of the money; but
it was withheld until the secretary's protest was heeded.
The whole difficulty arose over the validity of the practice
of the school fund commissioners in investing the funds
in state bank notes. These notes were then exchanged at
the auditor's office for certificates of indebtedness and the
state thereby came into possession of more currency with
which to meet its heavy obligations. Edwards justified
this diversion of the school money from its proper chan-
nels with the assertion that as soon as the state could ar-
range its disordered finances it would deal liberally with
its common schools.126
The year 1830 witnessed another struggle for the
governorship, with the bank as the leading issue. Lieuten-
ant-Governor Kinney, who it will be remembered had been
under suspicion during the investigation of the Edwards-
ville branch, was a candidate against John Keynolds,
formerly a judge of the supreme court of Illinois. It was
but natural that the whole Edwardsville scandal should
be unearthed and freely aired during the campaign. Kin-
ney took the position that he should be rewarded for the
years of labor and sacrifice spent in trying "to bolster
up the state bank." He stated that over twenty thousand
dollars in specie was due him at the time the bank opened.
He accepted bank notes at par as a matter of patriotic
duty to the state and subsequently paid most of them out
at thirty to thirty-five cents on the dollar. He cited the
favorable showing of the Edwardsville branch as well as
his exoneration by the legislature as the best evidence of
his ability and honesty in an office of trust.127
The opponents of the bank had an able candidate in
Judge Keynolds. In his speeches during the campaign
he insisted that he had always opposed the bank, that he
voted against its establishment, and that the people would
have to bear a heavy burden of taxation on account of the
sins of bank officials, like his opponent. The friends of
126Edwards, Life and Times of Edwards, 548, 549; Illinois Intelli-
gencer, February 5, 1831.
127Illinois Intelligencer, April 10, 1830.
407] BANKING A STATE MONOPOLY 49
the bank, on the other hand, pointed out that Judge Rey-
nolds was a borrower from the bank and as a member of
the legislature could always be counted upon to support
the various relief measures with which his party appealed
to the bank debtors for support at the polls. In spite of
these accusations, however, Judge Reynolds was elected.
Upon the legislature which met in December, 1830,
there devolved the difficult task of providing for the
liquidation of the state bank, whose charter was to expire
during the next year. The legislature of 1821 had pledged
all of the state's resources present and future to the re-
demption of the bank's notes, with the expectation that
the profits of the business would be more than ample to
provide for a final settlement of all liabilities. But the
nearer the day of reckoning approached, the less able was
the state to meet its obligations. The bank's resources
had been allowed to dwindle away ; while the condition of
the state's finances was daily becoming more precarious.
In his report of January 1, 1831, the state treasurer
stated that the amount still due the bank was $98,639.52.
Of the three hundred thousand dollars issued in 1821, $147,-
742 had been redeemed (mostly by a balancing of debits
against credits) and destroyed. There remained, there-
fore, $152,258 which the state must be prepared to redeem
before July 1. To meet this obligation there was to the
bank's credit $14,899.96 in cash, while the state had to its
credit about $20,000 more. The buildings of the bank
and branches were estimated to be worth $5,800.42. The
accrual of the state's ordinary revenue and the collection
of some of the bank's debts would help swell the total
available resources.128 At the same time, however, a large
amount of auditor's warrants was outstanding and the
ordinary expenses of the state government had to be met.
In his inaugural message129 Governor Reynolds advo-
cated the winding up of the bank's business as rapidly as
consideration for the welfare of the state and the debtors
would permit. He urged the legislature to uphold the
12*Senate Journal, 1830-31, pp. 181-83.
12gHouse Journal, 1830-31, p. 63.
50 THE DEVELOPMENT OF I5AXKING IN ILLINOIS [408
credit and character of the state by providing for the
prompt payment of its obligations. It required courage
and a high sense of public duty to disregard the wide-
spread sentiment in favor of repudiation.130 Nevertheless
a bill was passed by both houses authorizing the governor
to borrow a hundred thousand dollars at six per cent for
the purpose of aiding in the redemption of bank paper
and auditor's warrants, and replacing the money wrong-
fully taken from the school funds. The loan was to be
payable after 1850 in specie or notes of the United States
Bank.131 Governor Keynolds promptly entered into a
contract writh Samuel Wiggins of Cincinnati for the loan
of the entire amount but the state treasurer was not per-
mitted to draw upon Mr. Wiggins for more than thirty
thousand dollars before October 1. Governor Reynolds
very wisely based his calls for the various payments upon
accurate data as to the immediate needs of the treasury
and in this way reduced the interest payments to the
smallest possible amount.132 The following account taken
from Governor Ford's History of Illinois gives a vivid
picture of the effect of the loan upon the people :
"The money was obtained, and the notes of the
bank redeemed, the honor of the state was saved but the
legislature was damned for all time to come. The mem-
bers who voted for the law were struck with consternation
and fear at the first sign of public indignation. Instead
of boldly defending their act and denouncing the unprinci-
pled demagogues who were inflaming the minds of the
people these members when they returned to their con-
stituents went meanly sneaking about like guilty things
making the most humble excuses and apologies. A bolder
course of enlightening the public mind might have pre-
served the standing of the legislature and wrought a whole-
some revolution in public opinion then much needed. But
as it was the destruction of great men was noticeable for a
number of years. The Wiggins loan was long a bye word
130Ford, History of Illinois, 106.
13lLaws of Illinois, 130-31.
132Greene and Alvord, Governors' Letter Books, i, 162.
409] BANKING A STATE MONOPOLY 51
in the mouths of the people. Many affected to believe
that Wiggins had purchased the whole state, that the
inhabitants for generations to come had been made over
to him like cattle; and but few found favor in their sight
who had anything to do with the loan."133
Several other laws relating to the bank were passed
at the same session. One of them created a commission
for the purpose of counting and destroying bank notes. It
was to meet every three months to burn all the notes re-
deemed during that time, until all the original issue had
been destroyed. The membership of the commission con-
sisted of the governor, the secretary of state and the state
treasurer.134
An act for the further relief of bank debtors provided
that all who had not availed themselves of the relief act
of 1829 should be permitted to substitute for their regular
interest bearing obligation a non-interest bearing note
payable on or before May 1, 1832. If this note was paid
before December 1, 1831, a six per cent rebate was to be
deducted from the principal. In order to dispense with
the regular machinery of the bank as soon as possible, it
was provided that after July, 1832, the work of collecting
notes and mortgages due the brandies should be assigned
to the attorney general and the states attorneys. All
bank property was to be turned over to the state treasurer
as had been done in the case of the principal bank. Each
branch cashier was allowed two hundred and fifty dollars
for his services in closing up his work, his office to expire
on the first Monday in December 1832. After that date all
bank property was to be sold by the attorney general and
the states attorneys.133
Even with the instalments of the Wiggins loan be-
coming available at frequent intervals there was danger
of a shortage of specie for the redemption of notes. Ac-
cordingly it was provided that whenever a note was pre-
sented at the treasury and the money for its redemption
133Ford, History of Illinois, 107.
1SiLaws of Illinois, 1830-31, p. 190.
ia'-Ibid., p. 182.
52 THE DEVELOPMENT OF BANKING IN ILLINOIS [410
was not available, a state bond bearing six per cent in-
terest should be issued, redeemable at the state's pleasure,
provided the holder received two months' notice. These
bonds were receivable for all dues to the state. The treas-
urer was instructed to devote all specie not needed for cur-
rent expenses to the redemption of bank notes.136
In the meantime the president and directors of the
principal bank as well as the various state officers were
experiencing considerable difficulty in inducing James
M. Duncan, the late cashier of the bank, to surrender the
property of the bank to the state treasurer. The act of
January, 1829, required that he make the transfer by March
1 of that year, but he left Vandalia on account of ill health
and failed to comply with the law. On November 29
of that year the board of directors, having learned of his
delinquency, demanded that he surrender the bank's prop-
erty at once. He promised to do so immediately but did
not keep his word. In April, 1830, the circuit attorney at
the request of the board entered suit against Duncan and
his bondsmen for one hundred thousand dollars dam-
ages.137 In an interview with the editor of the Illinois
Intelligencer, Duncan stated that he considered the law
abolishing his office as defective in not providing for a
thorough checking up of the transfer and therefore was
not willing to assume the responsibility.138 The members
of the legislature determined upon getting possession of
the money and accounts of the bank without waiting for
the slow process of court procedure, sent a joint com-
mittee to Duncan's house and instructed them to bring
the property in question back with them. Duncan was
not at home and his wife declined to give it up on the
grounds that suits were in progress against her husband
and he needed the vouchers in the preparation of his
case.139 Two weeks later Duncan notified a committee
of the senate that he would leave the books of the bank
13tLaws of Illinois, 1830-31, 181.
137Senate Journal, 1830-31, pp. 172 ff.
138///iwo»j Intelligencer, July 17, 1830.
l*9Senate Journal, 1830-31, p. 189.
411] BANKING A STATE MONOPOLY 53
where they could get them but would not deliver them in
person.140 Later at a meeting held by the committee
Duncan was present and a compromise was reached by
which the legislature was to pass a law providing for
three referees to examine the books and agree upon a set-
tlement. Accordingly the act of February 1 was passed
providing for this method of settling the controversy. It
was specified that the final settlement must be ratified by
the general assembly and that Duncan was to be allowed
no salary for services since March 1, 1829. However,
Duncan was compelled to agree in writing that he would
abide by the decision of the referees and transfer all the
bank's property to the state treasurer.141 Before a settle-
ment was reached the legislature by a joint resolution de-
manded that Duncan turn over the money of the bank at
once, but he refused on the ground that referees had been
provided to settle his accounts and that he would await
their decision.142 When the legislature met in December,
1832, the treasurer reported that the books of the princi-
pal bank were still in the hands of the three auditors. The
cashiers of the branches had been allowed from July 4 to
the first Monday in December to post their books and hand
them over to the treasurer, but only two had done so.143
Such incidents as these, while unimportant in themselves,
are valuable for the light they throw upon the petty and
trifling methods that characterized the management of the
state bank.
With the help of the Wiggins loan the work of re-
deeming the outstanding notes was carried on so ex-
peditiously that by January 5, 1832, $289,000 of the issue
of three hundred thousand had been redeemed and
destroyed.144 Three years later the treasurer reported that
$6554.50 worth of the notes had not yet been presented.
Considering the comparatively large per cent of notes
140 'Senate Journal, 1830-31, p. 273.
l41Laws of Illinois, 1830-31, pp. 178-179.
l*2Senate Journal, 1830-31, p. 3591
148/&tU, 1832-33, pp. 72, 73.
l*4Ibid., 1832-33, p. 240.
54 THE DEVELOPMENT OF BANKING IN ILLINOIS [412
that were liable to be destroyed or mislaid, this is not a
surprising proportion of the whole issue.145
The legislature, either for political reasons or on ac-
count of the bank's debt, passed another relief law for
debtors to the bunk. It was provided that in case any
debtor settled his account with the bank before January
1, 1834, all of the interest and ten per cent of the principal
should be deducted provided the total rebate did not exceed
twenty-five per cent. The law further provided that if in
the judgment of the court the settlement of a decedent's
obligations with the bank would distress a widow and
orphans the court could declare the debt cancelled.146 As
a climax to the long series of acts granting relief to debtors
the supreme court, the following December (1833), in
the case of Linn vs. State Bank to which reference has
already been made, decided that the act authorizing the
bank was unconstitutional.
The effect of this release of debtors from all obligation
to the bank was to increase the already great burden of the
state by the amount that ultimately would have been col-
lected from these persons.147 Notwithstanding the effect
of the above decision, the legislature (1834-35) passed the
benefit act of February 14, 1835 in the evident hope of
half coercing, half coaxing the debtors to settle and ease
their consciences. The act provided that all persons still
indebted to the bank should be allowed to pay their debts
in three annual instalments, and that all past interest and
twenty-five per cent of the original principal should be
remitted at the time of granting the new accommodation.
However, if a person took advantage of this offer, all right
to the use of a plea of unconstitutionality was to be for-
feited.148
In the preparation of his annual report149 for 1834
the treasurer of the state made a thorough examination of
the books and papers of the bank and branches with a
/., 1834-35. P- 295.
146 Laws of Illinois, 1832-33, p. 584.
147Alton Spectator, December 21, 1833.
148Latttf of Illinois, 1834-35, P- 67.
149The report of the treasurer upon which the contents of this para-
graph are based is found in Senate Journal, 1834-35, P- 295-
413] BANKING A STATE MONOPOLY 55
view to furnishing the legislature with a complete resum£
of their affairs; but in every case careless bookkeeping
prevented his obtaining reliable data. The branch of
Shawneetown had been operated during the entire six
year term of its first cashier without any account being
kept against debtors, or any other reliable record of its
operations made. The second cashier had tried to supply
this deficiency but found the task a hopeless one. The
cashier at Brownsville had but recently been appointed to
the position and was unable to be of assistance to the
treasurer. The officers of the principal bank upon re-
linquishing their duties in December, 1832, had rendered an
account to the state but the treasurer found it to be in-
complete and unreliable. However an analysis of its
various items is of some value in so far as it reveals the
character of the whole undertaking and its great cost to
the state. The statement rendered by the bank is as
follows :
Debit
To capital $299,9 10.38
To balance 18,550.39
To amount of discounts received 59,059.21
$377,52048
Credit
Amount of notes received from principal bank $183,424.99
Expenses of bank and branches 57,302.26
Notes, etc., due the bank 79,5 10.34
Allowed for two per cent interest 5,403.23
Discounts under act of 1829 1,380.04
Allowed for prompt payment 2,140.00
Due by late cashier 27,439.21
Real estate unsold and suspended interest 5,129.26
Loss on sale of real estate 4,689.50
Appropriations paid at Shawneetown : 832.50
Profit and loss, Brownsville „ 3,764.96
Banking house (cost) 6,305.62
'Cash received previous to December 3, 1832 138.57
$377,520.48
The first item charged to the bank, "capital," repre-
sents the total issue of notes. These had been turned over
56 THE DEVELOPMENT OF BANKING IN ILLINOIS [414
by the state to the bank and branches and they had loaned
them out at six per cent interest which amounted to
$59,059.21, the third item in the liability column. The re-
maining item, "balance," seems to have been merely a book-
keeping device to make the two columns balance. On
the asset side of the statement the bank is credited with
having returned to the state $183,424.99 of the total note
issue but the books of the state treasurer showed that only
$162,326.63 had been repaid by the bank. At the time the
enterprise was projected it was expected that its earnings
would exceed the total cost to the state and so far as
the current expense account of the bank is concerned, the
statement shows it to have been almost $2,000 less than
the total earnings; but Mr. Dement, the state treasurer,
pointed out that a large part of the discounts earned was
uncollectible and that the $5,403.23 allowed in interest to
note holders, $1,380.04 and $2,140.00 granted as rebates
for prompt payment of loans, should be added to the cur-
rent expense account. The bank had already lost $3,764.96
from bad debts and bad management at Brownsville and
$4,689.50 on real estate bid in at judgment sales under
its own mortgages and later sold at a sacrifice. The bank-
ing house at Vandalia is listed at its original cost but Mr.
Dement estimated that this item as well as "real estate un-
sold" and "notes, etc., due" would suffer a great shrinkage.
In January, 1835, in fact, the book assets of the bank were
listed at $109,127 but on account of the death or insolvency
of a number of debtors as well as the decision that the bank
act was unconstitutional the treasurer estimated that their
real value was between seven and eight thousand dollars.
An examination of the treasurer's reports for a number
of years after this date shows that the estimate was not
far wrong.150 At the time the above statement was made
( December, 1832 ) , $27,439.21 in money and other valuables
was still in the hands of the late cashier, Mr. Duncan,
150Received from bank's assets November 30, 1834, to November 30,
1835, $2,502.18; from November 30, 1835, to November 30, 1836, $1,053.94;
from July i, 1837, to November 30, 1838, $169.00; from November 30, 1838,
to November 30, 1839, $385.54.
415]
BANKING A STATE MONOPOLY
57
pending an examination of his accounts, but as has been
noted in another connection this amount was soon paid
into the state treasury.
From data obtained from numbers of the Illinois
Advocate, Vandalia, and from the report of the treasurer,
the writer has compiled a table showing the general condi-
tion of each of the four branches at the expiration of the
bank's charter :181
There is no accurate record of the total loss entailed
by the state from the operations of the bank. Such a
record would include the loss of revenue from depreciated
currency, increased appropriations necessary in order to
meet the state's obligations with paper money, the loss
from loans which were never repaid and the interest on
indebtedness incurred because of the lack of dependable
funds in the treasury. The last named item would in-
clude the interest paid on auditor's warrants, fund bonds,
and on the Wiggins loan.
Ford estimates that the state lost more than $150,000
by accepting bank notes at the treasury and that its
expenditures were increased $150,000 more by meeting its
obligations with this paper. He also estimates the amount
of loans never repaid at $100,000.152 The Alton Spectator
in 1834 estimated that because of the bank the state debt
up to that time had been increased by $460,000.153 As
16llllinois Advocate, October 14, 28, November
1832; Treasurer's Report in Senate Journal, 1834-35
items are taken from the treasurer's report.
Edwards-
ville
Bank notes originally received..$83,5i6.oo
Expenses 11,501.31
Probable loss 10,000.00
Amount of loans repaid 78,064.38
Amount still due 21,982.07
Bank notes retired 66,253.00
Debts in collector's hands 20,764.19
Paid by debtor under relief act 966.82
162Ford, History of Illinois, 48.
188 January 25, 1834.
II, 1831, January 20,
p. 295. The starred
Browns-
Pal-
Shawnee-
ville
myra
town
$48,834.00
$47,265.00
$84,685-00
9,315.88
7,588.41
21,576.31
unknown
2,924-51
unknown
unknown
36,467.18
unknown
unknown
4,410.17
44,140.85
26,989.94
42,563-36
44,460.57
*7,686.57
not given
*35,992.98
628.00
335-25
*667.3i
58 THE DEVELOPMENT OF BANKING IN ILLINOIS [416
Knox points out, estimates of the loss to the state treas-
ury do not afford an accurate view of the total damage
inflicted by the state bank. The losses to individuals, the
injury inflicted upon the economic activities of a pioneer
community and the impairment of the state's credit can-
not even be estimated.154 According to a writer of the
period, the industry and thrift that characterized the three
years following the dissolution of the bank brought more
genuine relief to debtors "than could ten such banks."155
1B4Knox, History of Banking in the United States, 716.
155W. H. Brown, in Chicago American, December 25, 1840.
CHAPTER IV
BANKING AND INTERNAL IMPROVEMENTS.
With the winding up of the affairs of the old state bank
in 1831 came a brief period of relief so far as the existence
of local banks of issue was concerned. The legislature not
only defeated all banking projects that were presented to it
at its sessions in 1830-31 and 1832-33, but acts of incorpora-
tion of all sorts contained clauses prohibiting the exer-
cise of banking powers. In the senate, however, there was
a strong sentiment in favor of establishing a bank on a
specie basis ; in fact, in 1833 a project of this character was
lost by a single vote.1 Failing in this effort the friends of
the proposed measure sought to prevail upon Governor
Reynolds to call the legislature in special session, but he re-
fused to act on the ground that conditions were not yet
ripe for such an institution.2
In the gubernatorial campaign of 1834 General Dun-
can, the successful candidate, although a partisan of the
United States bank refused to make that institution a local
issue and thus avoided the alienation of the Jackson men.3
Governor Reynolds resigned a short time before the in-
auguration of Governor Duncan, the office being filled for
the time being by Acting Lieutenant-Governor Ewing, a
friend of state banking. In his message to the legislature
which assembled in December, 1834, Mr. Ewing urged the
immediate establishment of a state bank "upon a solid
gold and silver reality."4 The next day Governor Duncan
delivered his inaugural address in which he asked the leg-
islature to deal with the banking question with the great-
est caution. He granted that "banks may be made useful
in society" but he insisted that a system of banking which
would successfully meet the peculiar conditions prevailing
in Illinois had not yet been worked out.5
1Sangamo Journal, March 9, 1833.
2Alton American, November 22, 1833.
3Short, History of Morgan County, 691.
4Senate Journal, 1834-35, P- 12.
"Ibid., 13.
59
60 THE DEVELOPMENT OF BANKING IN ILLINOIS [418
Meanwhile the state had begun to recover from the
follies of the fiat paper days in spite of the fact that occa-
sional foreign bank notes found their way into the channels
of local trade. The treasury was now able to meet its obli-
gations with cash and the general prosperity of the com-
munity was equally encouraging.6 As this situation con-
tinued, the need of more currency and adequate banking
facilities became recognized. After the burning of the
notes of the old state bank and the failure of so many of
the "paper money mills" of the Middle West and South,
there was little available currency for the handling of the
increasing volume of trade. Aside from a few notes of the
Bank of the United States and still fewer United States
silver coins, Spanish, French and Mexican pieces consti-
tuted the only generally acceptable medium of exchange.7
In addition to the scarcity of money, a number of
other circumstances seemed to point the legislature to
establishment of a second state bank. In the first place,
it was predicted that the closing of the United States Bank
would cause widespread distress unless the states took
immediate steps to fill the gap left by it.8 The other states
were anticipating an era of great prosperity by authorizing
the establishment of banks of issue, and it was argued
that their notes would flood Illinois unless a local bank
were established as a measure of self-protection.9 Lastly
8Ford, History of Illinois, 170.
7Lorenzo Bull, in Illinois Bankers' Association Reports, 1901, p. 20.
BSangamo Journal, November 24, 1832, September 29, 1833, and Sep-
tember 22, 1832.
^Illinois Advocate, Vandalia, March 16, 1833. Sangamo Journal, Feb-
ruary 9, 1833. The following table taken from Dewey, Financial History
of the United States, 255, shows the rapid expansion of banking at this
period :
Number of Capital Circulation Loans
Year banks (millions) (millions) (millions)
1829 329 110.2 48.2 137.0
1834 506 200.0 94.8 324.1
1835 704 231.2 103.7 365.2
'836 713 251.9 140.3 457-5
1837 788 290.8 149.2 525.1
419] BANKING AND INTERNAL IMPROVEMENTS 61
this same wave of speculative prosperity which had gradu-
ally been moving westward was beginning to be felt in
Illinois.10 Continued peace among the nations, together
with the rapid expansion of the United States, had stimu-
lated the sale of public lands to an enormous degree. This
in turn led to the formulation of elaborate systems of in-
ternal improvement in order that a substantial increase
in land values might result.11 By 1835 the Illinois specu-
lator had just reached the point where he was demanding
the "accommodation" which could not be had without
access to a bank plentifully supplied with notes.12
The Democrats in the Illinois legislature which met
in 1834-35 were supposedly hostile to all banks, while the
Whigs were committed to a federal as opposed to a state
bank. By a combination, however, of the Whig forces
with those Democrats who interpreted President Jack-
son's hostility to the Bank of the United States as an in-
dorsement of the state institutions, a bill for the creation
of a new state bank was passed by both houses. Ford con-
tends that the necessary majority of one vote in the lower
house was obtained by trading a states attorneyship for
it and that similar inducements were held out to sena-
tors.13 In the council of revision Governor Duncan oppos-
ed the measure, but the rest of the members gave it their
sanction and it became a law on February 12, 1835.14
The main provisions of the charter of the new state
bank were as follows: Of the authorized capital of one
and one-half million dollars, all but one hundred thousand
dollars was to be sold to individuals. The remaining
shares were to be issued to the State of Illinois whenever
the legislature saw fit to provide the money.15 A further
stock issue to individuals of a million dollars might be
made when conditions warranted it.16 The charter was
10Ford, History of Illinois, 170.
"Dewey, Financial History of United States, 224, 225.
12Ford, History of Illinois, 170.
13 1 bid.
1*Sangatno Journal, May 13, 1842.
lsLaws of Illinois, 1834-35, P- 7, Section I.
18 Ibid., Section 2.
62 THE DEVELOPMENT OF BANKING IN ILLINOIS [420
to expire January 1, I860.17 Until then the bank had full
power to discount bills and notes, receive desposits, buy
and sell bullion and bills of exchange and issue bank
notes.18 The ownership of real estate, aside from the land
upon which the bank buildings might be built, was pro-
hibited.19 In view of the freedom with which the bank's
funds were used in speculation, it is important to note
that the directors were specifically forbidden to deal direct-
ly or indirectly in the purchase or sale of any goods or
wares whatever.20 The movement of population northward
led the legislature to locate the principal bank at Spring-
field instead of Vandalia, which continued, however, to be
the capital until 1839. In order to appease the people of
Vandalia, the bank was required to maintain a branch in
that place.21 If subscriptions for more than the authorized
one million four hundred thousand dollars worth of stock
were received, it was provided that the excess should be
deducted: first, from the amounts subscribed by non-
residents; second, from subscriptions by corporations;
third, from subscriptions for more than one thousand dol-
lars worth of stock ; fourth, from other subscriptions.
Each subscriber was required to make a first payment
of ten dollars in specie, or its equivalent, for each share of
stock purchased.22 The nine directors were each required
to own at least ten shares of stock and must be citizens of
Illinois. In voting, the method already described in con-
nection with the territorial Bank of Illinois, of giving to
the small stockholder more than a proportional voice, was
adopted.23 The selection of officers for the bank was left
to its board of directors. In order to augment its avail-
able capital the bank was empowered to receive on deposit
or to borrow any sum not exceeding one million dollars
17 Laws of Illinois, 1834-35, P- 7, Section 3.
18Ibid., Section 4.
™Ibid., Section 5.
20Ibid., Section 6.
2llbid., Section 8.
22Ibid., Section 10
2SIbid., Section n
421] BANKING AND INTERNAL IMPROVEMENTS 63
and to re-loan it at not more than ten per cent upon
Illinois real estate. The restriction was made, however,
that no loan should exceed half the value of the pledged
property and that no borrower should be granted a loan
from this fund for a longer period than five years.24 When
the bank had accumulated two hundred fifty thousand
dollars in specie, the directors were to notify the governor
who in turn should send persons to count the money and
to receive the oaths of the bank's officers to the effect that
the money was the bona fide property of the bank. As
soon as the governor was satisfied that the bank had com-
plied with the terms of its charter he was to proclaim
through at least four Illinois newspapers that the bank
was ready for business.25 The payment of the remaining
instalments on the bank's shares was left to the discre-
tion of the directors who were empowered to declare shares
forfeited if the owner failed to respond to a call.26 The
lawful rate of interest for loans of sixty days and less
was fixed at six per cent. Other loans were to bear a rate
of eight per cent.
The legislature made an effort to safeguard the in-
terest of the holders of the bank's notes by providing:
(1) The outstanding issue of notes should never exceed
two and one-half times the amount of paid up capital;
(2) The amount of loans and discounts should never
exceed three times the paid up capital; (3) Each director
was personally liable for the violation of these provisions
unless he had caused a written protest to be incorporated
in the minutes;27 (4) If any note holder, within ten days
after making the demand, failed to receive specie to the
full face value of a state bank note, the bank was required
to go into liquidation; (5) Furthermore, a penalty of ten
per cent per annum must be paid to all such note holders
until their notes were redeemed;28 (6) Finally, no note of
24Laws of Illinois, 1834-35, P- 7, Section 18.
26Ibid., Section 19.
2*Ibid., Section ao.
27Ibid., Section 24.
28Ibid., Section 26.
64 THE DEVELOPMENT OF BANKING IN ILLINOIS [422
a less denomination than five dollars might be issued.29
The legislature is further to be commended for providing
that there should not be a repetition of the disgraceful
relief laws which had characterized the history of the
old state bank.30
The constitution of 1818, as has already been noted,
specified that there should be no other banks in the state
save a state bank and the two territorial banks which were
then in existence. The charters of the old territorial
Bank of Illinois at Shawneetown and the City and Bank
of Cairo corporation had never been declared void although
the former concern had gone out of business in 1823
and the latter had never accepted its charter. Conse-
quently it was assumed that their charters were forfeited
by non-use.31 Nevertheless in their eagerness to share in
the coming tide of prosperity and internal development,
as Lyman J. Gage puts it,32 the Bank of Cairo "was
galvanized into a sickly life" at Kaskaskia, and the Bank
of Illinois corporation was reorganized and began business
late in 1834.
The twenty year charter of the Bank of Illinois33
would have expired on January 1, 1837, had not the legis-
lature by an act approved February 12, 1835,34 extended
its lease of life until 1857. The old charter was amended
in several important respects. In the first place, the
owners of the territorial bank who held stock in the new
institution were exempted from the forfeiture of their
stock and all previous payments upon it, if they were
unable to meet the calls of the directors for instalments.
On the contrary, they were entitled to the payment of all
past instalments, less interest and dividends. Secondly,
the governor was required to subscribe for the one hun-
dred thousand dollars worth of stock reserved for the
™Laws of Illinois, 1834-35, p. 7, Section 34.
*°Ibid., Section 31.
81Greene and Thompson, Governors' Letter Books, ii, 60, 61.
*2World's Congress of Bankers and Financiers, 428.
S8This bank should not be confused with the new state bank of Illinois.
**Laws of Illinois, 1834-35, P- 21.
423] BANKING AND INTERNAL IMPROVEMENTS 65
state in the old charter.35 This he was to sell at auction
at the highest premium, the profit to go to the state.
There were many more or less disinterested persons
who were opposed to allowing the Bank of Illinois to
resume business in the face of a constitutional prohibi-
tion of all non-state banks.36 The question was at length
taken into the courts where, first, the validity of the
original charter was attacked on the ground that Con-
gress had never given to the Territory of Illinois the
power to establish banks; secondly, the act of 1825 was
held to charter a private institution in contravention of
the Illinois constitution. The question was finally dis-
posed of by the supreme court of the state in People
vs. Marshall,37 when it was decided that the legislature
of the territory had acted within its rights in chartering
banks and that the charter then granted had never passed
out of existence.
The books for subscriptions to the stock of the state
bank were opened on April 10, 183538 and in less than
three weeks the one million four hundred thousand dol-
lars worth of stock was several times over-subscribed,39
the total applications for stock amounting to f 8,007,500.40
In accordance with Section 10 of the charter, the sub-
scribers were divided into four classes, (1) non-residents,
(2) corporations, (3) those resident citizens who sub-
scribed for more than a thousand dollars worth of stock,
(4) other persons. Beginning with class four and pro-
ceeding in reverse order to the other classes the shares
were to be given out as long as they lasted. John Till-
son of Hillsboro, Thomas Mather of Kaskaskia, Godfrey,
Oilman and company of Alton, Judge Smith41 of the
ssLaws of Illinois, 1816-17, p. n.
38Greene and Thompson, Governors' Letter Books, ii, 59, 60.
87i dim., 672.
**Sangamo Journal, April n, 1835.
*°Ibid., May 2, 1835.
40Ibid., May 23, 1835. Chicago Democrat, May 20, 1835.
41One of the persons attacked by Governor Edwards for the mis-
management of the Edwardsville branch of the old state bank.
66 THE DEVELOPMENT OF BANKING IN ILLINOIS [424
state supreme bench, and Samuel Wiggins of Cincinnati42
had contracted in the East for large amounts to be in-
vested in state bank stock. The charter of the bank
sought to avoid this very thing by giving the preference
to the small resident subscribers. Hence, in order to
be included in this favored class, these men, according
to Ford, empowered thousands of persons within the
state to act as their agents in subscribing for the stock
and thus secured a controlling interest. When the com-
missioners in charge of the subscription lists undertook
the work of apportionment of shares, a struggle for the
control of the bank was precipitated between Judge Smith
on the one side and the other persons just named on the
other. The first clash came when a commissioner moved
that shares bought by residents on their own account be
separated from those bought by them as agents for others.
Judge Smith favored the motion and expressed his will-
ingness to take oath to the effect that he owned and had
paid for with his own money every share of stock sub-
scribed for by him. Through the preponderating influence
of the other heavy investors, the motion was lost and the
bank was thereafter controlled by the Tillson, Mather,
Godfrey-Gilman interests. Mather was made president
of the bank and a directorate was chosen which even
Ford admits was as capable as could be found in the
state.43 The bank during its entire existence continued
to be dominated by non-resident shareholders.44
Having satisfied the governor that it had in its
vaults the requisite two hundred and fifty thousand dol-
42The capitalist who loaned $100,000 to the state in 1831.
43This account of the struggle for the control of the state bank is
taken from Ford, History of Illinois, 174, and from the article on the state
bank in the Illinois Annual Register and Business Directory (Chicago,
1847).
44Of the 14,000 shares of $100 each, five persons owned 7539, as fol-
lows : Samuel Wiggins, 1642 ; M. J. Williams, 577 ; Griggs and Company,
1202 ; W. S. Oilman, 2567. Four of the five lived in Cincinnati, Mr. Gilman
being the only resident of Illinois. Eleven others controlled 3948 shares,
making a total of 11,487 shares in the hands of but sixteen persons.
Sangamo Journal, March 5, 1836.
425] BANKING AND INTERNAL IMPROVEMENTS 67
lars in specie, the principal bank was opened for business
in July, 1835.45 Before the end of the year branches had
been established at Galena, Jacksonville, Alton, and
Chicago in addition to the branch located at Vandalia
by the legislature.46 Galena and Alton were probably
chosen because of the great interest that centered in their
development and because, as will be seen, the leading in-
vestors in bank stock were heavily involved in the projects
that were being carried on at these points. The legis-
lature having by the act of January 16, 1836, authorized
three additional branches47 establishments were eventu-
ally opened at Danville, Quincy, Belleville, and Mt. Car-
mel.48 Mr. N. H. Ridgely, who had secured his training
as chief clerk of the branch of the United States Bank
at St. Louis,49 was elected cashier of the principal bank
at a salary of three thousand dollars. He was allowed
one teller at a thousand dollars and two clerks at eight
hundred dollars each. In addition, President Mather
was voted twenty-five hundred dollars per annum for
his services. By the time the nine branches were put
into operation the list of officers had been increased to
thirty-five and the annual salary list to $30,600.50
Even with the widely distributed system of branches,
it was impossible for a person offering real estate as se-
curity to deal with the bank directly, hence the plan was
adopted of designating persons in different localities
as inspectors for the bank. These persons investigated,
at the borrower's expense, the character of the property
offered as security and made an examination of the
title.51 In accordance with the charter, the amount
^Illinois Advocate, July 8, 1835.
4*Ibid., February 17, 1836; Bross, History of Chicago, 41.
47Laws of Illinois, 1835-36, pp. 237, 238.
48Reports of Session, 1839-40, p. 285.
49U. S., H. of R., Comm. Reports, 1836-37, Doc. no. 193, p. 607.
*°Reports of Session, 1839-40, pp. 285, 286.
&lSangamo Journal, August 15, 1835. A fee of from three to ten
dollars was paid. Special Report of Invest. Comm., Illinois General As-
sembly, 1836-37, p. 36.
68 THE DEVELOPMENT OF BANKING IN ILLINOIS [426
loaned upon real estate could not exceed fifty per cent
of the valuation put upon it by the bank's representa-
tives. No loans upon town property were allowed52 and
loans upon personal security were confined to the dis-
counting of business paper, for the reason that the bank
was not a government depositary, hence was constantly
subject to a loss of its specie on account of the heavy land
sales.53 The depositary at St. Louis54 accepted the
notes of the state bank as far as private business was con-
cerned, but when it was preparing to forward government
deposits it was accustomed to send local bank notes home
for redemption, a practice which compelled the Illinois
bank to curtail its loans. All discounts were passed
upon at the daily meeting of the exchange committee of
the board of directors and were then submitted to the full
board at its biweekly meeting. The exchange committee
consisted of the president, the cashier and two directors
chosen monthly and derived its name from the fact that
its original function was to pass upon the purchase of bills
of exchange. This branch of the bank's business received
special attention and encouragement for the reason that
bills of exchange were considered "safer" and "more man-
ageable" than the ordinary accommodation paper even
if the profits were not so large. Moreover, bills of ex-
change on eastern cities were readily convertible into
specie if an emergency demanded it, while local accom-
modations could be called in only with the greatest diffi-
culty. For this reason it was contended that eastern bills
purchased by the bank could be used as the basis of a still
larger volume of domestic loans.55 The directors were de-
62Special Report, Invest. Comm., Illinois General Assembly, 1836-37,
p. 36.
63Sangamo Journal, March 5, 1836.
54Ibid., May 21, 1836. After the disastrous failure of the Bank of
Missouri, that state was left without any banking institution save the
branch of the United States Bank which was soon to go out of existence.
The legislature refused to charter any more banks, so the large federal
deposits were given to the St. Louis "agency" of the Commercial Bank
of Cincinnati. U. S., H. 'of R., Comm. Reports, 1836-37. No. 193, p. 598.
^Special Report, Invest. Comm., Illinois General Assembly, 1836-37,
P- 40.
427] BANKING AND INTERNAL IMPROVEMENTS 69
termined to prevent a depreciation of the bank's notes
and yet desired to accomplish this aim with a minimum
payment of specie for their redemption. This policy of
trying to avoid both "Scylla and Charybdis" at times com-
pelled the adoption of some extraordinary measures. For
instance, while the negotiations were in progress with
the St. Louis depositary which led to its agreeing to accept
state bank paper under the conditions noted above, a
large amount of the Illinois notes accumulated at St.
Louis. Since the depositary had not yet decided to accept
them at par, merchants sold them to brokers at a discount
of two or three per cent rather than go to the trouble
of sending them back for redemption. This caused great
anxiety on the part of the state bank officials, and funds
to the amount of nineteen thousand five hundred dollars
were promptly forwarded to an agent of the state bank at
St. Louis with the instruction that he should buy all the
Illinois paper offered, at one per cent discount. He had
bought very little of the paper when the depositary agreed
to accept Illinois paper and the notes went to par. The
directors of the bank were then accused of making a profit
by speculating in their own paper, but testified before
a committee of the legislature that the small profit made
was more than offset by the expenses incurred.56 On
another occasion, President Mather purchased sixteen hun-
dred dollars worth of the bank's paper from a New York
broker at a discount of one and three-fourths per cent,
his excuse being that it was liable to fall into the hands
of westward bound immigrants who would present it for
redemption.57.
The bank had, however, a most effective means of pro-
tecting its small supply of specie. Instead of having a
common form of bank note, redeemable at the parent
bank or any of its branches separate issues were provided
for each branch. Consequently, notes bearing the name
of one branch were sent to another and distant branch
^Special Report, Invest. Comm., Illinois General Assembly, 1836-37*
P- 40.
"Ibid.
70 THE DEVELOPMENT OF BANKING IX ILLINOIS [428
to be loaned, but were redeemable only at the place named
on the face of the note. In this way, the whole of the
note issue was kept in circulation without many demands
being made upon the specie reserve.68
On December 7, 1835, the governor convened the legis-
lature in special session to consider, among other things,
the advisability of increasing the capital stock of the
state bank. It will be recalled that one hundred thousand
dollars of the original issue was reserved for the state
but that the amount owned by private individuals could
be increased by one million dollars. The charter did not
specify whether the state or the bank could control this
additional issue of stock, hence Governor Duncan urged
the legislature to exercise the privilege of issuing and
selling these shares before the bank had a chance to act.
At the time the governor's call was issued, state bank
shares were quoted at 113 and the prospect of an addition
of one hundred and thirty thousand dollars in premiums
to the state's revenues appealed to the governor as a wise
stroke of policy. By the time the legislature assembled,
however, the stock had fallen in price, but Governor Dun-
can predicted that it would soon rise to 120 or even 130.
He therefore urged the immediate passage of an act desig-
nating the state as an agent to sell one million dollars
worth of state bank stock at not less than one hundred
ten dollars per share, the premium to go to the state
treasury.59
The bank's friends in the legislature were too numer-
ous and influential to submit to such a plan, and secured
in its stead the passage of the act of January 16, 1836,
to which reference has already been made. In addition to
the section providing for three additional branches, the
act specifically reserved to the directors of the bank the
right to sell additional issues of stock. Furthermore, it
was definitely stated that the profits accruing from the
^Chicago American, March 12, 1836; Ford, History of Illinois, 179;
Special Report, Invest. Comm., IHinois General Assembly, 1836-37, p. 36.
"Governor's message, Senate Journal, 1835-36, p. 9.
429] BANKING AND INTERNAL IMPROVEMENTS 71
sale of shares should belong to the bank.60 Section 25 of
the charter had provided that the bank should be
granted ten days in which to redeem its notes. The time
was now extended to sixty days.01 As a compensation to
the state for the privileges above granted, the bank was
required to relieve the state of the payment of the principal
and interest of the loan of one hundred thousand dollars
secured from Samuel Wiggins in 1831.02 The bank ac-
cepted this condition June 9, 1836, and paid the interest
on the loan until 1841, when it was relieved of further
responsibility in the matter by surrendering one hundred
thousand dollars in state bonds.63 Meanwhile the directors
issued for sale at public auction the additional one million
dollars worth of stock and made an arrangement with Mr.
Wiggins whereby a syndicate organized by him was to
purchase at 110 all the shares left unsold. When the
auction was over it was found that only 1335 of the shares
ahad been sold, so Mr. Wiggins and his partners were com-
pelled to take the remaining 8665.04
The legislature at the special session to which refer-
ence has just been made provided that the bills of the
state bank and branches should be receivable for state
and county taxes and in payment of the principal and in-
terest of the debts due the college, school and seminary
funds. A proviso was made, however, that the state bank
was not to construe the act as preventing the state from
conferring a like favor upon the bills of the other Illinois
banks. In spite of the auspicious beginning made by the
state bank, the legislature had learned that it was best
to be forearmed when dealing with paper money. Accord-
ingly the proviso was inserted in the bill that if the gov-
ernor, auditor and treasurer should decide that the state
was likely to suffer any loss by accepting state bank notes,
they should at once cause a notice to be inserted in every
"Lau'S of Illinois, 1835-36, p. 237, Section I.
*llbid., Section 3.
62/&irf., 238, Section 4.
'3Ret>orts of Session (H. /?.), 1851, p. 485.
"Reports of Session (Senate), 1840-41, p. 336.
72 THE DEVELOPMENT OF BANKING IN ILLINOIS [430
newspaper of the state to the effect that these notes were
no longer receivable in payment of public dues.65
It will be recalled that one of the influences which
aided in securing the passage of the bank bill was the
prospect of securing a share of the federal deposits. The
very day66 on which the charter of the bank was approved,
Mr. Mather took the matter up with the Washington gov-
ernment through Senator Kane.07 A few weeks later
Theophilus W. Smith, who had not yet crossed swords
with his opponents for the control of the bank, urged
Secretary of the Treasury Woodbury to take favorable
action at once in order to facilitate the sale of the stock.68
To these letters as well as similar communications from
other Illinois bank promoters, Secretary Woodbury made
the same reply, that he did not feel justified in making a
depositary of a bank which as yet existed only on paper.69
As soon as the bank was ready for business, a formal ap-
plication was made but Mr. Woodbury pleaded as an
excuse for delay a lack of definite information as to the
ownership and financial standing of the bank. A list of
the stock holders was promptly forwarded to him, together
with statements as to the bank's standing at various in-
tervals. Mr. Woodbury next sought to discourage the
directors by indicating to them the little need there was
for a disbursing agency in a thinly populated community.
He warned them that the large revenues collected in the
state from the sale of public lands would have to be trans-
ferred at once to other parts of the country, leaving but
a very small permanent balance with the state deposi-
tary.70 President Mather, however, promptly expressed
*sLaws of Illinois, 1835-36, p. 244.
"February 12, 1835.
•7Page 599 of the proceedings of the special committee appointed by
the national house of representatives to investigate the relations which
existed between R. M. Whitney, special examiner of depositary banks, and
R. M. Whitney and Company, Washington, representatives of a number
of depositaries.
68U. S., H. of R., Special Comm. Report, 597.
"Ibid.
., 604.
431] BANKING AND INTERNAL IMPROVEMENTS 73
the willingness of the directors to be content with what-
ever funds the government saw fit to allot to them.71 In
the meantime Judge Smith, defeated in his attempt to con-
trol the bank, carried the fight to Washington. With his
letter to Mr. Woodbury, attacking the men in control of
the bank, he inclosed a copy of the proceedings of the com-
mission which allotted the shares of stock. Having but a
few months before besought Mr. Woodbury to make the
bank a depositary, Mr. Smith now felt it his special duty
to apprize the treasury department of the great danger of
entrusting the present regime of unscrupulous politicians
with government funds.72
It is well to note here that the bank was under the
control of Whigs and that Mr. Smith and other political
opponents used this fact against it with the Jackson ad-
ministration. In like manner, William Kinney in a letter
to Mr. Woodbury characterized the state bank as an "insti-
tution chartered by the influence of a designing man
for the sole purpose of speculation both in pecuniary
and political matters." He predicted that if this Whig
institution were entrusted with federal deposits it would
be so ungrateful as to turn against the Van Buren cause
and "throw sand in the eyes of the present administration
and its true advocates."73 A similar communication was
received by Mr. Woodbury from Samuel McRoberts, a re-
ceiver of public money. He warned the administration
"that the president and nearly all of the directors of the
principal bank, all the cashiers of the branches, and an
immense majority of the branch directors have been most
decided opposition men to General Jackson, to his meas-
ures, to his friends and supporters." He hoped that so
long as the bank continued in the hands of the "federal
party" it might not receive the patronage of the govern-
ment.74 One cannot get the least inkling from Mr. Wood-
bury's replies to these men or from any of his utterances
T1U. S., H. of R., Special Comtn. Report, 604.
"Ibid., 605 ff.
"/fcfrf.
T4U. S., H. of R., Special Comm. Report, 612.
74 THE DEVELOPMENT OF BANKING IN ILLINOIS [432
in connection with the whole affair that he was swayed
by political considerations but without giving a formal
decision against the state bank, he early developed an un-
favorable attitude toward its case.75
As the heavy drain upon the bank's specie continued
with the increased land entries, the directors decided to
adopt more summary measures in order to secure the
government deposits. Accordingly they sent one of their
number, Mr. John Tillson, to Washington to wait upon
the treasury officials. When he reached New York, en
route, Mr. Tillson sought to pave the way by writing to
Beuben M. Whitney, special examiner of depositaries,
asking him to use his influence with his chief, Mr. Wood-
bury. He promised that if all went well, Mr. Whitney's
firm would be employed as the Washington representatives
of the Illinois state bank at whatever salary it was cus-
tomary for a western bank to pay for such a service.78
In reply, Mr. Whitney stated very frankly that the depart-
ment was unfavorably disposed toward the bank and an-
nounced his intention of doing all in his power to prevent
the selection of such an institution as a federal depositary
even if such action involved the loss of a substantial fee.
Unlike his superior officer, Mr. Whitney did not hesitate
to bring political considerations into the matter by de-
claring that an institution which had openly worked for
the election of its friends to represent the Springfield dis-
trict in the legislature was unfit to handle government
funds. Notwithstanding this rebuff, Mr. Tillson proceeded
to Washington and presented his case to the treasury
officials.77
In a letter of December 8, 1835, addressed to Presi-
dent Mather, Mr. Woodbury furnished the officers of the
bank a definite list of charges that had been made against
it.78 The first of these was that the stock had been allotted
illegally. The second, that the bank was merely posing
Tr>U. S., H. of R., Special Conim. Report, 612, 613.
™Ibid., 102.
"Ibid., 102.
., 613.
433] BANKING AND INTERNAL IMPROVEMENTS 75
as a state bank in order to exist in contravention of the
state constitution. The third, that the notes issued at
one branch were put into circulation at some other dis-
tant branch which refused to redeem them.79 To these
charges, Mr. Woodbury added the personal objection that
the branches at Galena and Chicago, the only places where
the bank could be of much service to the government, had
not been placed in operation. He inclosed a blank bond
and application sheet, however, and asked that they be
returned, filled out, together with the bank's answers
to the charges. Mr. Mather's reply80 to the charges is a
crude attempt at evasion and subterfuge. He stated that
"the distribution of the stock was in conformity with the
provisions of the charter — the whole of it being assigned
to citizens of the state in the manner defined by the char-
ter." He admitted that the state did not own a dollar's
worth of stock in the bank but considered that it still
had "an interest" in the bank so long as the bank was re-
quired to pay an annual tax into the state treasury. He
failed to see how any person could consider a charter un-
constitutional which had received the unanimous approval
of the supreme judges sitting as members of the council
of revision. The reply of Mr. Mather to the charge that
the branches were refusing to redeem one another's notes
is somewhat vague. He admitted that separate sets of
notes were ordered for each branch and that these had
just been received from the printer, but he did not promise
that the notes of one branch would be redeemed by an-
other. He explained further that until they had received
their separate issues the branches had been issuing the
notes of the parent bank. As to whether the branches
ever refused to redeem this temporary issue, Mr. Mather
replied vaguely: "Of course, the bank could not have
refused to redeem its notes, as stated. I will add, that all
the present paper issued at Alton has been promptly re-
79The Alton branch is mentioned in particular. Mr. Woodbury ob-
tained this information from T. W. Smith's letter of November first.
Ibid., 614.
., 615.
76 THE DEVELOPMENT OF BANKING IN ILLINOIS [434
deemed there whenever presented." In closing, Mr. Mather
assured Mr. Woodbury that the Galena and Chicago
branches were now in a position to take care of govern-
ment deposits. A few weeks later, Mr. Woodbury sub-
mitted the question of the constitutionality of the bank
to Attorney General Butler and was given the opinion
that it was not a state institution and therefore its whole
existence was in defiance of the Illinois constitution.81
The directors of the bank, realizing the futility of
further effort, formally requested Mr. Woodbury to "sus-
pend" the application of the bank until he received further
notice.82 The statement of Mr. Whitney in his letter to
Mr. Tillson that the bank was meddling in Illinois politics
aroused the anger of the Illinois Whigs. As a result the
state senate in January, 1836, appointed a committee of
five to take evidence, first, as to whether the control of
the public money had not been put to an improper use by
the Jackson administration in trying to force local banks
to support Van Buren ; second, as to whether Mr. Whitney,
who was "now stationed near the treasury," was not hold-
ing an improper correspondence with the state bank offi-
cials.83 The committee examined the correspondence of
the bank and summoned Colonel Mather, Judge Smith,
Samuel Wiggins and others to testify, but aside from mak-
ing "political capital" nothing came of the investiga-
tion.84 In August, 1836, the Shawneetown bank was
made a special depositary for the public money collected
at the Shawneetown land office83 and for a time had the
use of considerable sums of money, but as the govern-
ment land sales diminished this amount on deposit
decreased until after 1836 a nominal deposit of only forty
*lSangamo Journal, May 13, 1842. In connection with the question
of constitutionality, it is interesting to note that Judge Smith, who drew
up the charter and fought for its passage, was in hearty accord with the
attorney general's opinion. Ford, History of Illinois, 179.
82U. S., H. of R., Special Comm. Report, 619.
83Senate Journal, 1835-36, p. 259.
**Mlssouri Republican, January 19, 1836.
6iSangamo Journal, August 27, 1836.
435] BANKING AND INTERNAL IMPROVEMENTS 77
dollars was kept in the bank, probably as a sort of "retain-
ing fee."86
By midsummer, 1836, the country-wide wave of specu-
lation in land and town lots had reached Illinois. Under
its influence Chicago grew like magic from a mere settle-
ment to a city of several thousand inhabitants and became
the center of the real estate business of the adjoining
states and territories. It was in Chicago that town
site speculators exhibited their plats and auctioned off
their lots. Her fame spread rapidly through the East
and started a stream of immigration by way of the Erie
Canal and the Great Lakes. The mania for speculation
spread throughout Illinois with the result that the inter-
ests of legitmate business were everywhere sacrificed to
the desire for suddenly acquired riches.87 The demand
for loans at the state bank far exceeded its accomoda-
tions on account of a lack of specie. Since the issuance
of the specie circular, the heavy drain on the bank's cash
reserves by land purchasers now came directly from the
purchasers themselves, whereas before they paid with
notes of the bank which were later returned by the de-
positary bank for redemption.88 As a consequence of
this condition, the bank suspended its discount business
until it received a shipment of $280,000 in gold and silver
from New York and New Orleans.89
The people of Illinois, as well as the citizens of the
older states, were beginning to be carried away with the
idea that improved means of communication must be
provided regardless of the cost. In Illinois this idea was
86Various reports of the hank show the following amounts on deposit
by the United States treasurer :
January, 1837 $81,414.60
January, 1838 28,14247
November, 1838 40.00
November, 1839 40.00
November, 1840 „ 40.00
and so on until the bank went into liquidation.
^Reports of Session (Senate), 1839-40, p. 5; Ford, History of Illinois,
181.
8sSanga»io Journal, August 13, 1836.
"Illinois Register (Vandalia), November 4, 1836.
78 THE DEVELOPMENT OF BANKING IN ILLINOIS [436
given expression through the press and in mass meetings
in the principal towns. When the general assembly con-
vened in December, 1836, an internal improvement con-
vention also assembled at the capital for the purpose
of influencing the members of the legislature to provide
for an elaborate system of railroads and waterways.90
The legislature responded most liberally. Instead of
merely providing for the completion of the canal between
the Illinois River and the Great Lakes, a task which
alone would have been a strain upon a pioneer com-
munity, they authorized the immediate construction by
the state of seven railway lines and the dredging of all
the important rivers. As an anti-climax to the whole per-
formance, the sum of two hundred thousand dollars was
voted as a gift to those counties which had not been
given a line of railroad.91 In order to carry out this pro-
gram the legislature authorized a loan of eight millions,
an amount eight times as great as the total expenses of
the state government from its inception to the year 1836.
The next problem, however, was not so easily solved:
How was the enormous annual interest bill to be met?
The people were already as heavily burdened with taxes
as their meager resources would permit and no legislator
would have the courage to face his angry constituents
after proposing or voting for such a measure. At length
it occurred to the framers of the bill that the banks
could be made a part of the internal improvement system.
As one of the leading journals of the state put it: "In
connection with our internal improvement system it is
impossible not to associate the banks of this state — the
interests of both are alike and rest alike upon enlightened
public opinion. One is the hand-maid of the other, and
since the internal improvement system is based upon
credit it cannot be carried on without the aid of banks."92
90C. M. Thompson, Governors' Letter Books, ii, Introduction, li ; see
also Douglas, Autobiography, in Illinois State Historical Society Journal,
October, 1912.
01Laws of Illinois, 1836-37, pp. 121, 131-133, 134-136.
92Sangamo Journal, January 27, 1837.
437] BANKING AND INTERNAL IMPROVEMENTS 79
During the eighteen months of its existence the state
bank had declared dividends aggregating seven dollars
and seventy-five cents a share,93 an amount equal to nine
per cent on the paid up capital, and the Bank of Illinois
had done quite as well.94 It seemed plausible to the mem-
bers of the legislature, therefore, that if the state be-
came the owner of a large amount of profitable bank
stock, the financial obligations of the internal improve-
ment system could be met with ease. Accordingly
there was inserted in the internal improvement act
the following provision: "All profits arising from bank
and other stocks hereafter to be subscribed for and owned
by this state, after liquidating the interest on loans con-
tracted for the purchase of such bank or other stock,"
should be devoted to the payment of the interest on the
eight millions to be borrowed for internal improvements.95
Governor Duncan in his message to the legislature96 had
recommended that the state subscribe only for the one
hundred thousand dollars' worth of stock reserved for it
in the charter of the state bank, but the legislature was not
disposed to stop at this modest sum. By the acts of March
2 and 4, 1837, not only was the one hundred thousand dol-
lars' worth of stock subscribed for, but the capital of
$2,500,000 was increased to $4,500,000,97 and the state took
the whole additional issue of |2,000,000.98 At the same
time the capital stock of the Bank of Illinois was increased
from |300,000 to f 1,700,000, of which one million dollars'
worth was to be subscribed for by the state."
In order to provide the necessary funds for the pur-
chase of this stock, the board of fund commissioners, a
93Report of state bank investigating committee, 1836-37, p. 36.
9*Senate Journal, 1836-37, pp. 352 ff.
°*Laws of Illinois, 1836-37, p. 137.
"Senate Journal, 1836-37, p. 22.
9TOnly a small part of the million dollar additional issue of shares of
capital stock to individuals was ever paid in, so the total capital liability
was never much in excess of $3,500,000. Reports of Session (Senate),
1839-40, p. 301.
88 Laws of Illinois, 1836-37, p. 18.
"Ibid., Section 6.
80 THE DEVELOPMENT OF BANKING IN ILLINOIS [438
body created to direct the financing of the internal im-
provements, was authorized to float a loan of not more than
three million dollars. There were to be issued to the lend-
ers shares of "Illinois Bank and Internal Improvement
Stock," bearing interest at not more than six per cent, and
redeemable by the state at any time after I860.100 In no
case, however, could these bonds be sold for less than par.
The fund commissioners were to dispose of enough bonds
to enable them with the aid of available cash in the treas-
ury to make a payment to the two banks equal to those
already made by private stockholders on their shares. To
the nine directors of the state bank were added five state
directors elected biennially by a vote of the two houses of
the general assembly.101 This arrangement was hardly a
fair one, however, for it gave to the state, the owner of a
majority of the shares, a minority of the directorate. In
like manner, state directors were added to the board of the
Shawneetown bank and its activities were enlarged by
providing for branches at Jacksonville, Lawrenceville and
Alton, and authorizing the establishment of two others.102
The bank law as well as the internal improvement act pro-
vided that the net profits arising from the stock must be
applied to the interest upon internal improvement bonds.
The banks were made the depositaries of the funds accumu-
lating from the sale of bonds and were required to pay to
the state a rate of interest agreed upon by both parties.
Moreover, the act designated the banks as the fiscal agents
of the state as long as quarterly statements of their condi-
tion indicated that they were solvent.103
The original charter of the state bank permitted the
directors to borrow any sum not exceeding a million dollars
for the purpose of making loans on real estate. The legis-
of Illinois, 1836-37, p. 18, Section 3.
101 Ibid., Section 8.
102The bank of Illinois later established one of these at Pekin. Laws
of Illinois, 1849, p. 39.
™3Ibid., 1836-37, p. 18, Sections 10, 12.
439] BANKING AND INTERNAL IMPROVEMENTS 81
lature now extended this privilege to the Bank of Illinois,
but set a maximum limit of $250,000.104
The legislature still contained a considerable element
hostile to banks and they succeeded in carrying a resolution
providing for the investigation of the state bank's affairs
by a joint committee of five.105 The object stated in the
resolution was to ascertain whether the bank had violated
any of the provisions of its charter and was on that account
not a fit place to keep the state's funds. In spite of the
able opposition of Abraham Lincoln,106 who contended that
such an investigation was an unwarranted intrusion into
the affairs of what was still a private institution, the resolu-
tion was adopted. The report of the committee declared
that the bank's management was free from all questionable
practices and declared that it was not only a safe place to
keep funds, but that its shares would prove a good invest-
ment for the state.
A similar investigation of the Bank of Illinois throws
light upon the general policy of conducting that institution
since its revival in 1835.107 The Bank of Illinois had not
yet become a state institution and hence could have pre-
vented any intrusion into its private affairs, but President
Marshall was anxious to make a good impression and placed
all the bank's records at the disposal of the committee, not
to mention a bountiful supply of whisky and "plenty of
sugar to sweeten it."108 The bank was found to be owned
and managed by practically the same men who had it in
charge during its brief existence some years before. All
the directors were men of good standing in southeastern
Illinois, most of them having lived in the neighborhood of
10*Laws of Illinois, 1836-37, p. 17.
l°*Senate Journal, 1836-37, p. 244.
1MSangamo Journal, January 28, 1837. Mr. Lincoln was a member of
the lower house, having been elected as a Whig from the Springfield
district. He was a staunch friend of the state bank.
l°7Senate Journal, 1836-37, p. 352. For complete report of the inves-
tigation see, also, U. S., Letter of Secy, of Treas. on State Banks, 1838,
pp. 778-783.
108Ford, History of Illinois, 197.
82 THE DEVELOPMENT OF BANKING IN ILLINOIS [440
Shawneetown for over twenty years.109 They had been
impartial in making loans and discounts, restricting the
latter to business men.110 As for loans, the entire business
of the bank was confined to property loans in southeastern
Illinois. The principal item of income arose from the pur-
chase and sale of bills of exchange. The southern Illinois
farmer usually shipped his grain and live stock down the
river to New Orleans and drew a bill of exchange on the
commission man in that city. These bills were sold to the
bank and being payable at short dates were used to replen-
ish its stock of specie. The committee found a reserve of
specie on hand to the amount of $47,278, and a few days
later a shipment of $23,300 arrived, making a total of
$70,578 as against an outstanding circulation of $105,563
and deposits to the amount of $1 10,000.
The committee found that the practice, forbidden by
the legislature at this session,111 had been indulged in of
issuing bank notes payable at some point outside the state.
Of the $105,563 in bank notes then outstanding, $83,178
had been issued at home, $14,900 at Philadelphia, $2,825 at
Louisville, and $4,660 at New Orleans. The bank had just
redeemed $8,500 of the Philadelphia issue, which left but
$13,885 to come under the ban of the new law. The direc-
tors gave as their reason for this foreign issue the desire to
create at these places ample funds with which to meet the
needs of Illinois merchants without seriously disturbing
the bank's credits created by the shipment of grain and pro-
visions. On the whole, the two committees seem to have
had grounds for their laudatory comments on the manage-
ment of the two banks.
With the entry of the state into the field of banking
the situation was completely changed. Illinois had received
from the federal government $477,919.14 as her share of
the surplus revenue distributed among the states in 1836.112
100Senate Journal, 1836-37, p. 356.
110Ibid., 355-
111Laws of Illinois, 1836-37, p. 18.
112Auditor's Report, Laws of Illinois, 1836-37, p. 193.
441] BANKING AND INTERNAL IMPROVEMENTS 83
The legislature devoted $335,592.32 of this sum to the re-
payment of the amounts taken from the school fund by
their predecessors and spent the rest in internal improve-
ments. Since, however, funds were needed to pay for a
portion of the state's bank stock in cash, the federal money
just returned to the school fund was reborrowed and di-
vided between the two banks.113 As soon as the new "Bank-
ing and Internal Improvement" bonds were ready, the com-
missioners proceeded to New York to offer them for sale,
in order that the balance due the banks for the state's shares
of stock might be met. On the day set for opening the
bids for the bonds, the commissioners were chagrined to
find that not a single offer had been made. The act forbade
them to sell the bonds at less than par, so they were com-
pelled to abandon their efforts. The banks were now so
involved in the state's affairs that they agreed to accept
the bonds at their face value in payment of the remainder
of the state's stock; the state bank took $1,765,000 worth
and the Shawneetown bank, $900,000. The latter bank
afterwards succeeded in disposing of its share but those
taken over by the state bank continued to burden its re-
sources and embarrass its operations during the rest of its
existence.114 The banks had scarcely begun to adjust them-
selves to their new relationship with the state when the
panic of 1837 burst upon the country and left ruin every-
where.
Beginning in New York City, the first week in May,
the suspension of specie payments by the banks spread
like a contagion down the Middle Atlantic Coast and then
to the West and South.115 By the twenty-second of May
it had reached the St. Louis depositary bank and a week
later the Illinois banks voted to suspend for an indefinite
period.116 In so doing the directors of the state bank un-
doubtedly realized that the legislature would not demand
the winding up of the bank's affairs as a penalty for violat-
liaSenate Journal, 1842-43, p. 36.
114Ford, History of Illinois, 190.
116Sangamo Journal, May 27, 1837.
116Ibid., June 3, 1837; Senate Journal (special session), 1837, p. 12.
£4 THE DEVELOPMENT OF BANKING IN ILLINOIS [442
ing its charter by suspending specie payment, while the
charter of the Shawneetown bank did not contain such a
forfeiture clause at all. The banks and the state were now
TSO closely associated that the sudden termination of the
activities of either of them would result in indescribable
chaos in the state's finances. Thoroughly alarmed at the
possibility of such a contingency in the case of the state
bank, two of the canal commissioners hastened to Jackson-
ville in search of the governor. They finally persuaded
him to call a special session of the legislature in order that
legal sanction might be given to the violation of the bank's
charter. Accordingly at the opening of the special session
in July, 1837, a memorial was presented from the state
bank asking that the penalty of forfeiture be suspended.
The legislature acceded to the request and authorized the
suspension of specie payments until the end of the next
general assembly. Certain stipulations were imposed, how-
ever, the chief of which were: (1) No dividend could be
declared until the bank resumed specie payment; (2) No
specie could be disposed of in any way, except in amounts
of five dollars or less, for change; (3) A monthly statement
of the bank's condition must be furnished the governor and
the newspaper owned by the state printer; (4) The total
issue of notes during suspension must not exceed the
amount of capital actually paid in; (5) The state's funds
must be collected and disbursed as usual; (6) Relief must
be granted to the bank's debtors by allowing them to pay
their notes in instalments; (7) If any of the foregoing
provisions was violated, the bank's charter was ipso fa<io
liable to forfeiture.117
A brief act was also passed at the special session au-
thorizing the state to sell its stock in the banks to private
individuals if funds were needed to meet the interest on
internal improvement loans.118 Notwithstanding that the
crisis now made their extravagant railroad and waterway
program impossible of fulfilment, the legislature refused
ll7Laws of Illinois (special session), 1837, p. 6.
5.
443] BANKING AND INTERNAL IMPROVEMENTS 85
to curtail the plans in any way. By the fall of 1837, hard
times set in, but the banks were powerless to furnish aid to
tide over the situation. Instead, the discounting of notes
was reduced to a minimum and suits were instituted
against delinquent borrowers, most of whom were business
men. They in turn had done a very heavy credit business
since 1835 and were compelled to force the farmers and
artisans to settle with them.119 This caused a feeling of
resentment against the banks among the rank and file of
the people.
The Whig party and its newspaper organs remained
loyal to the banks, but the Democratic journals either de-
nounced all banks on general principles or favored their
establishment on an absolutely specie-paying basis.120 Even
Governor Ewing, who had been instrumental in the estab-
lishment of the state bank, now turned against banks in gen-
eral and his former pet project in particular.121
As conditions throughout the country began to im-
prove the Illinois banks, after a suspension of over thirteen
months, resumed specie payment, August 13, 1838.122 In
Governor Duncan's farewell message to the legislature in
December, 1838, he again urged in vain the repeal of the
whole internal improvement system. As for the banks, he
commended them for' their voluntary resumption and for
their general stability displayed during the crisis. To en-
courage the relief of the multitude of poverty stricken land
holders he suggested that the state furnish, without any
responsibility therefor, to any person lending money on
Illinois land for five years at six per cent, circulating notes
to the full amount of the principal, to be secured by the
mortgage on the property, the lender to be allowed to circu-
late these notes freely provided he redeemed them promptly
in specie.123 Instead of giving serious consideration to the
119Memoirs of Gustave Koerner, 429.
l20Sangamo Journal, August 19, 1837.
121/fr»U, July 29, 1837.
I2*lbid., August 18, 1838.
123House Journal, 1838-39, p. 14.
86 THE DEVELOPMENT OF BANKING IN ILLINOIS [444
governor's proposal, the legislature made more secure the
monopoly of note issue enjoyed by the banks, by passing
the act of December 4, which prohibited persons and private
institutions from issuing notes.124
Governor Carlin was a bank hater, and in his inaugural
address took the reverse of his predecessor's position.125
He denounced the state bank in particular and pointed out
four dangerous defects in the existing system : ( 1 ) There
was no adequate machinery for compelling the banks to
comply with their charters; (2) They were allowed to med-
dle in politics with impunity; (3) The state bank was
lending millions to a few speculators; (4) The legislature
did not use the means it had of compelling the banks to live
up to the letter of the law. While he deplored the fact
that such an elaborate system of improvements had been
inaugurated, Mr. Carlin was of the opinion that it was
too late to turn back after an expenditure of ten millions
had been made. The legislature heeded his advice by au-
thorizing nearly a million dollars' worth of additional
projects rather than surrender the principle of state con-
struction of public improvements.126 In addition to the act
forbidding the issue of notes by unauthorized persons, sev-
eral other minor bank laws were passed at this session.
The first of these was known as the foreign small note act
and had for its object the expulsion from the state of all
notes of less than five dollars denomination. The state bank
had been forbidden by its charter to issue notes smaller
than five dollars and the Bank of Illinois had consistently
followed the policy of not doing so,127 hence the public had
been compelled to depend for its small notes upon the issues
of the Bank of Cairo and a miscellaneous assortment of
foreign notes. By excluding foreign small notes a monop-
oly of the issue of ones, twos and threes was given to the
Bank of Cairo, but, as will be seen, this privilege was later
124Lotc'j of Illinois, 1838-39, p. 80.
l2SSenate Journal, 1838-39, p. 18.
lz*Reports of Session (Senate), 1839-40, p. 5.
127Senate Journal, 1836-37, pp. 354 ff.
445] BANKING AND INTERNAL IMPROVEMENTS 87
exercised also by the Bank of Illinois and the legislature
finally extended it to the state bank.128 A third act relating
to banks was passed at the 1838-39 session. It placed the
selection of the state directors of the two banks in the
hands of the governor, instead of the legislature.129
The federal government still refused to establish a de-
positary in the state, hence the depositary at St. Louis
continued to receive the large amount of land money col-
lected from Illinois purchasers. The legislature by joint
resolution again besought the secretary of the treasury to
make the state bank a federal depositary but he had no
funds to place in the hands of the Whigs. The official rea-
son given was that the banks of Illinois did not conform
to the federal requirements by refraining from paying small
bills to their patrons.130 The secretary, however, found it
convenient to use the Chicago branch of the state bank and
in 1839-40 had nearly |150,000 on deposit there.131 The
failure to secure the federal deposits was a hard blow to
the state bank and its excessive issue of notes soon began to
depreciate.
Meanwhile the temporary revival of business in 1838
and the earily part of 1839 was followed by a second crisis
in the autumn of 1839. When the news reached Springfield,
October 20, that the banks of the East and South had again
suspended specie payment, the directors of the state bank
were called together and again decided to order another
suspension in spite of losing their charter by so doing. Mes-
sengers were despatched to every branch notifying them
to suspend at once.132 The news spread quickly and the
next morning a large amount of notes was presented at the
bank for redemption ; but the directors refused to pay out
l28Laws of Illinois, 1838-39, p. 79. The note issues of the Bank of
Cairo will be taken up hereafter in connection with the history of that
institution.
129/Wrf., 234.
130Sangamo Journal, January 19, 1839.
131Ref>orts of Session (Senate), 1839-40, p. 310.
Register, Ivii, 167.
88 THE DEVELOPMENT OF BANKING IN ILLINOIS [446
any specie.133 The directors of the Bank of Illinois at first
decided that they were able to weather the storm,134 but
after making the attempt for two weeks they followed the
example of the state bank.135
The alarming condition of the state's finances caused
the governor to convene the legislature in the special ses-
sion of 1839-40. The credit of the state had been extended
to the limit, the total liabilities aggregating $11,107,919.44
and calling for an annual interest payment of $637,800.136
Furthermore, to provide funds to complete the work al-
ready authorized would increase the amount to $21,846,-
444.50. Not only had the legislature ordered the work
over the whole system of improvements to be undertaken
simultaneously but they had, as has been noted, enlarged
the scope of the wrork. The governor now urged that only
one or two of the most important projects be continued.
He then proceeded to criticize the state bank; first for
having suspended specie payment again; second, for
utterly disregarding the interests of the state and the gen-
eral public by furthering the interests of a few speculators
in lead and pork. He therefore recommended that no
mercy be shown the bank and that its recent operations be
subjected to a most searching investigation. The attitude
of the governor and the legislature seems to have been
more friendly toward the Bank of Illinois.137 Conse-
quently they were content to let that institution off with a
demand addressed to its state directors for an explanation
as to their votes in favor of suspension. The defense
offered by the directors was that the interests of the state
demanded that the bank's specie be thus protected during
country-wide suspensions of specie payment. Furthermore,
they argued that the constant advances to the state had
weakened the bank's ability to withstand a drain of its
gold and silver. The part of the reply that was calculated
133Sf. Louis Bulletin, October 24, 1839.
1S4Shawneetown Voice and Journal, October 26, 1839.
13sRef>orts of Session (Senate), 1839-40, p. 46.
3.
12.
447] BANKING AND INTERNAL IMPROVEMENTS 89
to appeal to the legislature was the statement that if the
bank must continue to pay out specie, it must curtail
its discounts and loans to such an extent that no dividend
could be paid on the state's million dollars worth of
stock.188
With regard to the state bank, the legislature decided
to follow Governor Carlin's advice and give its affairs a
thorough airing before a committee of the two houses.
Although the majority of the committee appointed favored
the bank wherever possible, they were forced to acknow-
ledge in their report that startling abuses had crept into
its management. All the members agreed that the bank had
violated its charter by a suspension lasting more than
sixty days, but on other more important matters the dis-
cord was so great that three separate reports were submit-
ted to the legislature.139 A number of persistent rumors
about the bank were investigated by the committee and
more or less truth was found in them. In the first place,
the statement that money was loaned to non-residents was
found to be correct but the amount had been greatly exag-
gerated, only four per cent of the loans having been made
to persons outside of the state. There was a current rumor
that Kevins, Townsend, and Company, the bank's eastern
correspondents, were given the use of large sums without
interest, but on the contrary the bank was found to have
overdrawn its account with this house to the extent of
$150,000. Considerable suspicion having been attached
to the stockholdings of Samuel Wiggins of Cincinnati, the
committee made a careful inquiry as to the character of
his relations with the bank. They found that of the
original issue of $1,400,000, Mr. Wiggins obtained $193,100.
He had paid some of the installments when called for, but
in October, 1835, he had failed to respond to the call and
was compelled to ask that the penalty of forfeiture of his
stock be not inflicted for sixty days. Contrary to the
bank's charter, he was granted a loan of a sufficient amount
138Rcl>orts of Session (Senate) 1839-40 f 128.
139/&uf., 241 ff.
90 THE DEVELOPMENT OF BANKING IN ILLINOIS [448
to meet the call, by offering $50,000 worth of his stock
as collateral.140 The bank not only renewed this loan from
time to time, but in addition advanced enough money to
•enable Mr. Wiggins to complete the payments on his
$ 193,100 worth of stock. In over four years, he had repaid
but $18,500 of the $58,500 borrowed but had continued to
draw a semi-annual dividend on all the stock.
In addition to his personal holding, it will be remem-
bered that Mr. Wiggins was a member of a syndicate which
agreed to purchase all the second issue of a million dol-
lars left unsold. They had paid eleven dollars on each of
the 8,665 shares and were receiving a proportional share
of the dividends and Mr. Wiggins had a correspondingly
larger voice in the direction of the bank's management
although ineligible to a place in the directorate. Aside
from the accommodations granted to Mr. Wiggins, the
bank had confined its activities very largely within the
state. It had even refrained from accepting any consider-
able share of the St. Louis patronage which would have
been exceedingly profitable on account of the large volume
of produce which was transhipped at that point. But this
failure to accommodate the business men of St. Louis was
due to no exalted ideas of devotion to home interests but
was the result of the selfish ambition of a small clique of
Alton speculators to destroy the commercial supremacy of
St. Louis and to amass great fortunes for themselves by
diverting the commerce of the Mississippi to Alton. As
has been noted, Godfrey, Oilman and Company, Alton
commission merchants, had a large portion of the state
bank stock under their control and unlike the other influ-
ential stockholders, were residents of the state and eligible
to election as directors. Accordingly, Mr. Gilman had
been a director of the parent bank for over three years and
Mr. Godfrey had held a directorship in the Alton branch
for almost as long a time. But for reasons which are
about to be revealed, both had recently resigned their
respective offices.141
140Reports of Session (Senate), 1839-40, p. 274.
/., 289.
449] BANKING AND INTERNAL IMPROVEMENTS 91
Since the prosperity of their business depended upon
the development of Alton at the expense of St. Louis, this
firm proceeded to enlist the state bank in their campaign
to make Alton the commercial emporium of the Mississippi
Valley. Much of the corn and pork from the farms of the
Middle West, as well as the lead from the mines at Galena
on the upper Mississippi, were sold to St. Louis merchants
and transhipped by them to southern or eastern markets,
thus creating for the benefit of St. Louis brokers a large
amount of credit in the money centers of the country.142
The region around Galena was exporting by way of St.
Louis six or seven hundred thousand dollars worth of lead
each year, the greater part of it to the Atlantic seaboard,
and the directors of the state bank were allured by the
prospect of becoming the possessors of the large amount of
credit that would result from these shipments. Conse-
quently, they were easily persuaded to make liberal ad-
vances to the Alton lead merchants, especially to their
fellow directors, Messrs. Godfrey and Gilman. In fact, the
accommodations to this one firm as drawers, discounters,
and endorsers of paper amounted to $800,748.00143 before
the other directors came to their senses and called a halt.
The larger part of this liability had been created by the
firm's transactions with H. H. Gear, a Galena lead pro-
ducer, who, whenever he drew bills of exchange on them for
shipments of lead, promptly sold them to the Galena
branch of the state bank. The bank, however, was not
wholly committed to the interests of one Alton concern for
it had made similar advances of over one hundred thousand
dollars to the firm of A. G. Sloo and Company.144 With
such generous financial backing the Alton commission
men had combined for the purpose of raising the price of
lead and succeeded in a short time in raising it from |2.75
per hundred weight to $4.25. In their efforts to corner the
supply they bought with a free hand, but soon found that
lt2Reports of Session (Senate), 1839-40, p. 277.
ltalbid., 256.
14*Ibid., 265 ; Ford, History of Illinois, 176.
92 THE DEVELOPMENT OF BANKING IN ILLINOIS [450
they were unable to control the situation in the eastern
market, which was supplied by scores of producers.145 By
the time their lead reached New York, the market had
become so unsatisfactory that the whole large shipment
was placed in the warehouses to await a rise in price.
Meanwhile in addition to their speculations on the lead
market itself, Godfrey, Gilman and Company had used
several hundred thousand dollars of the bank's money in
buying up mines and smelters and in speculating in Galena
town lots.146 The burden, therefore, finally became too
great and they and their fellow speculators were compelled
to bring their lead out of storage and sell it at a great
sacrifice. Sloo and Company went into bankruptcy and
the other firms were practically ruined. Mr. Gear of
Galena was compelled by the directors to assume a large
part of Godfrey, Gilman and Company's obligation, thus
reducing that firm's liability to the bank to |419,358.147
The attempt to make Alton a great metropolis cost the bank
nearly a million dollars and brought disaster to the city's
legitimate business interests.148
The connection of the bank with speculation in Illinois
produce did not end here, for it came dangerously
near to the point of speculating in lead and pork on its
own account. In its eagerness to secure credit in the
East the bank had united with some Galena mine owners
in employing J. G. Lamb of Alton as their joint agent.
According to the arrangement made with Mr. Lamb, these
lead producers delivered their product to the Galena branch
of the bank and were paid about three-fourths of its market
value. The cashier then shipped the lead to Mr. Lamb,
who in turn consigned it to Nevins, Townsend and Com-
pany, the bank's New York correspondents. When the
lead was sold in the New York market, Nevins, Townsend
and Company placed the proceeds to the credit of the state
14*Reports of Session (Senate), 1839-40, p. 277.
14«Ford, History of Illinois, 176.
147 Reports of Session (Senate), 1839-40, p. 265.
148Ford, History of Illinois, 176.
451] BANKING AND INTERNAL IMPROVEMENTS 93
bank. The bank in turn deducted the interest on the
money paid to the lead producers and credited Mr. Lamb
with the rest. Mr. Lamb then deducted his commission
and other charges and sent the producer a check for the
balance. Thus while the bank cannot be said to have
speculated directly in lead it was guilty of devoting too
large a share of its resources to the fostering of a highly
hazardous undertaking.149
The cashier and clerk of the Chicago branch also dis-
played a lack of good judgment, to say the least, by engag-
ing in pork speculation with two Chicago commission men.
They used over $26,000 of the bank's funds in this way at
a time when accommodations were being refused the legiti-
mate enterprises of the city.150
Closely related to the inquiry into the bank's relations
with speculators was the charge that all the directors as
well as members of the legislature had received a dispropor-
tionate amount of credit. In spite of the fact that Messrs.
Godfrey and Gilman had now withdrawn from the director-
ate, it was found that $493,227.57 was due the bank from
its directors and the firms of which they were members.
The president of the bank urged in defense of the practice
of favoring the directors the consideration that these men
gave a great deal of valuable time to the bank's business
and were entitled to special consideration in lieu of a fixed
salary.151 As for special favors being shown members of
the legislature, the investigation showed that twenty-one
members had borrowed over $2,000 each, but that their total
liabilities reached the modest sum of $50,394.26.152 The
extent to which the bank accommodated the different
classes of borrowers, however, can be seen from the fol-
lowing table in which debtors are divided into groups ac-
cording to the amount of their obligations.153
l*9Rcports of Session (Senate), 1839-40, pp. 311 ff., 336.
150/Wrf., 266, 331, 332.
., pp. 279, 287.
307.
290.
94 THE DEVELOPMENT OF BANKING IN ILLINOIS [452
Amount Number of borrowers
$200 or less 1875
$200-500 1408
$500-1000 713
$i 000-3000 732
$3000-5000 172
Over $5000 202
Although the majority report of the committee ex-
pressed confidence in the bank's solvency, in spite of its
reckless advances to favorites, an analysis of the official
statement of the institution for January, 1840, reveals
some assets of a very questionable value.154 For example,
the first item under "assets" (discounts, bills of exchange
and loans) amounts to $3,937,584.75, but Dr. Murphy of
Chicago, a member of the committee, in his separate re-
port, shows that at least $921,461.19 of this amount should
have been listed as a suspended debt.155 The second item
in the "asset" column, "Illinois State Bonds," shows that
the bank had not been able to dispose of the $1,765,000 in
state bonds received in part payment of the state's shares,
nor the $699,750 worth of canal stock unloaded by the state
upon the directors of the bank.156 In view of the actual
market value of Illinois securities, the bonds should have
been entered at about half their face value instead of at
par. It was evident, therefore, that if the bank were com-
pelled to forfeit its charter because of its recent suspension
of specie payment, the stockholders, including the state,
would not be able to realize the full amount invested in
the enterprise.
The legislature, although dominated by Democrats,
many of them hostile to banks, decided that the state's
interests demanded a further postponement of the penalty
of forfeiture. By the act of January 31, 1840, the bank
was allowed to continue the suspension of specie payments
until the close of the next session of the legislature. The
directors, however, were required to bind themselves to an
154Ref>orts of Session (Senate), 1839-40, 348.
"«Ibid., p. 263.
/., 308.
453] BANKING AND INTERNAL IMPROVEMENTS 95
agreement: (1) To make no more loans based upon the
bank's stock; (2) To permit any person holding five or
more shares to become a director; (3) To limit the amount
of liabilities of any one person to $10,000 in promissory
notes and $25,000 in bills of exchange; (4) To choose not
less than three new directors at the next election and not
less than two new members at each succeeding election ; (5)
To accept their own currency for all claims against them.
In addition to these stipulations, the restrictions placed
upon the bank during its former suspension were again put
into force.157
The use of bank funds for pork speculation by officers
of the Chicago branch furnished an opportunity for some
of the legislators to "get even" with the cashier of the
branch by securing its removal from Chicago to Lockport,
a village about forty miles away, on the line of the Illinois
and Michigan Canal.158 During its existence of less than
four years the Chicago branch had been a factor in the
rapid development of that city. It had furnished eastern
exchange at from one to two per cent while its discounts
of business paper averaged about $500,000. The directors
of the parent bank, however, decided to obey the mandate
of the legislature and in July, 1840, closed the branch.159
Scarcely had a beginning been made in the new location,
however, when the legislature restored the branch to Chi-
cago.160 On the whole, the most commendable piece of legis-
lation enacted at the special session, although it dealt only
indirectly with the banks, was the repeal of the internal
improvement act and the issuance of an order that all work
be indefinitely suspended.161
The year 1840 witnessed some improvement in the gen-
eral situation in Illinois but the banks were gradually
falling into bad repute. Their notes, which had never
™7Laws of Illinois, 1839-40, p. 15.
«8/fruf.
ls*Chicago American, August 7, 1840.
160Laws of Illinois, 1840-41, p. 40.
191Ibid., 1839-40, p. 93.
96 THE DEVELOPMENT OF BANKING IN ILLINOIS [454
suffered a discount of more than two or three per cent, were
now rated by brokers at ninety cents on the dollar. Hence
it was estimated by Congressman Stuart in a speech in
the federal house of representatives that the bank paper
of Illinois was costing the people of the state one hundred
and sixty thousand dollars a year in higher prices for
goods bought in the East and lower prices for produce sold
there.162 A number of Chicago business men made an un-
successful attempt to drive Illinois bank paper out of
circulation in that city, while the notes were dubbed "bank
rags" by the newspapers.163
Meanwhile the interest bill of the state had assumed
such alarming proportions that Governor Carlin was forced
to summon the legislature to meet two weeks before the
regular date (December 7, 1840) in order that some way
might be devised for providing tfie needed revenue. There
had been so much resentment manifested toward previous
legislatures which had levied additional taxes that some of
the members favored a bill providing for the purchase by
the state of three millions of additional bank stock, with
the expectation that the dividends on the $6,100,000 thus
invested would not only pay the interest on the money
borrowed to buy the stock but would suffice for the pay-
ment of the state's entire interest bill. In support of the
project it was urged that the unsatisfactory condition of
the banks was due solely to a lack of capital and if this
were supplied, dividends wrould probably increase at once
to the desired amount.164 Governor Carlin was bitterly
opposed to this plan and warned the legislature against all
such chimerical schemes.165 The matter was referred to
the committee on banks, which presented in its report the
following vivid picture of the existing situation :160
"Such schemes of producing wealth as the multiplica-
tion of banks and paper money all end in disaster. Up to
162Quoted by the Vandalia Free Press, June 26, 1840.
163Chicago American, October 9, 1840.
™*Reports of Session (H. of R.), 1840-41, p. 13.
196Reports of Session (Senate), 1840-41, p. 3.
"•/Wrf. (H. of R.), 14.
455] BANKING AND INTERNAL IMPROVEMENTS 97
1836-37, when their capital was increased, our whole debt
was only $100,000. Three years have elapsed and what is
their history? Paper money multiplied, foreign debts cre-
ated, visionary schemes of internal improvement com-
menced and abandoned — prodigality abounding in every
department, until we find ourselves burdened with a debt
of thirteen millions. The payment of this stock at the
present rate of our bonds would involve borrowing four
millions to pay three. Since 1837 the dividends have been
constantly diminishing until we find them for the last year
only equal to the interest on our bonds.167 .... The banks
have been in operation for four years and during a large
portion of the time have been in a state of suspension. . . .
They have been unable to handle three millions rightly,
then why give them three more?"
The legislature was convinced of the wisdom of this
view and partially met the situation by voting an increase
of taxes. The immediate needs, however, had to be met in
a very questionable manner. The fund commissioners
being unable to sell the state's interest bonds, hypothecated
$804,000 with Macalister and Stebbins of Philadelphia as
security for a loan of but $321,600. The firm remitted
$261,500, but, according to Ford, the state never was paid
the rest.168
By summoning the legislature two weeks earlier than
the time fixed by the constitution Governor Carlin caused
a very important question to be raised. The Democrats
held that since the regular session could not lawfully begin
until December 7, the session called by the governor was
167The following table shows the fluctuation in the semi-annual divi-
dend rate in the case of both banks. Reports of Session (Senate), 1840-41,
p. 15. State Bank Bank of Illinois
June, 1837 „ 2l/2% not given
December, 1837 5 not given
June, 1838 5 not given
December, 1838 4
June, 1839 4 4
December, 1839 31A 4
June, 1840 3 3
168Fcrd, History of Illinois, 198.
98 THE DEVELOPMENT OF BANKING IN ILLINOIS [456
entirely distinct from the regular session and must be ad-
journed sine die on the preceding legislative day, Decem-
ber 5. It will be remembered that the state bank was re-
quired by the recent suspension act to resume at the close
of the next session of the legislature, but the directors
naturally supposed that there were several months in
which to prepare for resumption and had not given the
matter serious consideration. When the Whig members
realized the seriousness of the bank's situation, they
planned to absent themselves from the room and thus break
up the quorum and prevent adjournment. When the fifth
of December arrived they proceeded to carry out their plot,
but the Democrats gra«ped the situation and by guarding
the doors and windows until a motion for adjournment
could be carried, won the day and forced the bank to the
choice of resumption or liquidation.169
The state bank, in common with those of the entire
West and South, had originally planned to resume volun-
tarily, January 15, 1841, but now that it was suddenly
confronted with the danger of losing its charter, the direc-
tors hurriedly voted to resume at once.170 In order to for-
tify itself as much as possible in its single-handed battle,
the bank ceased discounting entirely and refrained from the
issue of notes as far as possible. As a somewhat pardonable
measure of revenge upon the legislature, it was ordered
that all further advances to the state should cease. The
bank had been very liberal in allowing the state to over-
draw its account to the extent of $196,000 and the directors
estimated that at the present rate this overdraft would
amount to about $300,000 by the end of the next year. In
undertaking to resume specie payments, the bank was not
only compelled to cut off all sources of profit but was offer-
ing several cents premium for specie, hence its officers felt
"•Letter of W. Fithian to A. Williams, December 6, 1840, in Williams-
Woodbury Mss.; Ford, History of Illinois, 225; Reports of Session (Sen-
ate), 1840-41, p. 12.
170Sangamo Journal, December 18, 1840.
457] BANKING AND INTERNAL IMPROVEMENTS 99
no compunctions about refusing further advances to the
state.171
The directors had adopted this policy of resuming
single-handed with the firm belief that the other banks
would live up to their agreement to resume, January 15,
but as that day drew near instead of specie, only excuses
were offered to note holders and the State Bank of Illinois
continued to fight it out alone.172 On January 25, the rep-
resentatives of the banks of Kentucky, Indiana, Ohio and
Illinois met in convention at Louisville to fix another date
for resumption, but failing to reach a decision, they ar-
ranged for a second meeting at some distant date. The
state bank's officials came home thoroughly discouraged,
for there seemed to be no prospect for a general resumption
within the next six months or possibly a year. During the
bank's own brief period of resumption $455,000 in specie
had been withdrawn by note holders and it was evident
that such a situation could not long continue.173 And yet,
on the other hand, the surrender of the charter would in-
volve the sale of the state bonds at an enormous loss and
the collection of loans at a time when the borrowers were
unable to meet their obligations in full. The curtailment
of the bank's activities and the contraction of the currency
by the retirement of the $455,000 of redeemed notes had
already caused a fall in prices, and made the lot of the
debtor increasingly hard. These considerations were pre-
sented by the directors of the state bank to the legislature
in the form of a memorial, in which was also incorporated
a request for further authorization of the suspension of
specie payment.174
In the interval which had elapsed since the legislature
had brought about the humiliation of the state bank, the
members had occasion to pay dearly for their cruel sport,
for as soon as the bank had been compelled to resume, it
l7lReports of Session (Senate), 1840-41, p. 14.
112Chicago American, January 15, 1841.
17BRef>orts of Session (Senate), 1840-41, pp. 416 ff.
"«/*££
100 THE DEVELOPMENT OF BANKING IN ILLINOIS [458
stopped cashing their salary warrants and they were com-
pelled to dispose of them at half their value.175 Conse-
quently, as the session drew near its close, those members
who had been so eager to compel a strict compliance with
the law were now disposed to show mercy. Accordingly,
by the act of February 27, 1841, the banks of the state were
declared free to suspend until the other banks of the South
and West should resume. As the New York Evening Post
put it, "the Illinois legislature has authorized the sale of
indulgences."176 The act even set aside any forfeiture that
might have accrued before December 5, 1840. In addition
to the long list of restrictions imposed at the time of the
last suspension, it was further provided that the interest
on loans should be reduced one per cent, in order to accom-
modate the more impecunious borrowers. Until January
1, 1843, the state bank could issue one, two and three dollar
notes, but, in return for this and other favors, it was forced
to purchase of the state at par fifty thousand dollars' worth
of six per cent bonds every six months for two years. The
state treasurer was specifically instructed, however, not to
use the money thus obtained for paying any of the state's
indebtedness to the bank. The maximum amount for which
a director, or any firm of which he was a member, could
thereafter become liable, was reduced to $5,000.177
Both the state bank and the Bank of Illinois were com-
pelled to give bonds as surety for an agreement not to pay
any dividends to private stockholders during suspension,
but they were both required to declare "to the full amount"
the "just and proper dividends on the state's stock."178
Owing to a slight difference in the wording of their respect-
ive charters, the Bank of Illinois had been paying a capital
stock tax on all its paid up capital while the state bank
paid only on the three-sevenths of its capital owned by
individuals. The inequality was remedied in the "suspen-
175Chicago American, December 18, 1840; Ford, History of Illinois,
225.
"'Quoted by Sangamo Journal, April 2, 1841.
177Laws of Illinois, 1840-41, p 40.
., p. 42.
459] BANKING AND INTERNAL IMPROVEMENTS 101
sion act" by the imposition of a "bonus" of one-half of one
per cent per annum on all the state shares of the state
bank.179 The legislature at the same session, authorized
the auditor, treasurer and secretary of state to settle with
the Bank of Illinois for generous advances made by it to
the state capitol building fund and the internal improve-
ment account. The bank was given the warrant of the
auditor for the full amount, payable after 1850, with inter-
est at six per cent,1 80
The state bank had never been permitted to issue notes
of a less denomination than five dollars, and this indulgence
was granted now in the belief that the ones, twos, and
threes would supply the place filled by gold and silver and
thus the banks would soon be able to accumulate a sufficient
amount of the displaced coins to warrant early resumption
of specie payments. But instead of facilitating resumption
the small notes had the opposite effect and the task of ac-
cumulating specie became more difficult than before.181 In-
stead of continuing their policy of retrenchment the officers
of the state bank plunged more deeply than ever into finan-
cial difficulties. They enlarged its circulation and pro-
ceeded to erect a costly banking house, while its stock was
quoted at thirty-seven cents on the dollar and the institu-
tion itself was rated in New York as utterly insolvent.182
In spite of this condition of affairs the directors voted them-
selves, as compensation for their services, the use of four
thousand dollars each, without interest.183 When June 1
arrived the directors purchased fifty thousand dollars'
worth of state bonds as required by the suspension act, but
were unable to pay any dividends on state stock.184
So long as the Bank of Illinois continued under the
careful management of John Marshall and his colleagues,.
Reports, 1840-41, p. 186.
180Laws of Illinois, 1840-41, p. 39.
181 Ford, History of Illinois, 226.
182Chicago Democrat, September 14, 1841.
183Sangamo Journal, November 19, 1841.
184/fctrf., July 23, 1841.
102 THE DEVELOPMENT OF BANKING IN ILLINOIS [460
who had guided the bank's affairs in the old territorial days
and had revived its charter in 1834, it was at least able to
bear up under the crushing load which its partnership with
the state had thrust upon it. Its affairs, however, were
becoming badly entangled and when it paid the semi-annual
dividend in July, its resources were strained to the ut-
most.185 Although the directors had suspended specie pay-
ments whenever the other banks of the West had taken
such action, they did so with impunity, for they were not
liable to forfeiture of their charter. But at length the
anti-Marshall faction among the stockholders, defeated in
their effort to oust the officers of the bank and to place
J. C. Stickney at the head of affairs, instituted quo war-
ranto proceedings based upon the plea that the charter of
the bank was unconstitutional. As was noted in an earlier
part of this discussion, the court decided in favor of the
bank's charter.188 At the annual election of officers, Janu-
ary 2, 1843, Mr. Marshall declined election as president and
the bank's policy was soon changed to one of getting all
that was possible out of a doomed enterprise before it
should go to pieces. In their effort to carry out this policy
the directors even attempted to defraud the state, as will
be seen in connection with the settlement of the bank's
affairs.
In spite of the ever increasing evils of state banking,
the Illinois Whigs continued in their loyalty and argued
that all that was needed to remedy the situation was an-
other national bank to act as a regulator of the state insti-
tutions.187 The opposition of the Democrats was consid-
ered by the Whigs as disloyalty to the country's institu-
tions. On the other hand, "the Whigs in the estimation of
the Democrats were a set of bank vassals, and were fre-
quently called by the Democrats 'the ragocracy.' The presi-
™*Sangamo Journal, July 23, 1841.
1MIbid., January 21, 1841. Decision of the supreme court is found in
I Gilm. 672.
I81lbid., November 12, 1841.
461] BANKING AND INTERNAL IMPROVEMENTS 103
dents and directors of the bank were called 'rag barons,'
bank paper was called 'bank rags,' and 'written' or 'printed
lies.' "188
Now that the state had finally abandoned the various
internal improvement projects, several of the directors of
the bank became interested in a proposition to take over
the Northern Cross Railroad, which was the most
promising of the projected lines of railway. Accordingly,
they entered into an agreement to complete the line for
the state and to receive payment in Illinois and Michigan
Canal bonds.189 These same directors with the aid of their
fellows had made a rule that the bank should not expand
its issue of paper during the suspension of specie payments,
but now they proceeded to disregard the bank's condition
and voted themselves and their business partners generous
loans for building the railroad. When a beginning had
been made it was easy to continue and even the state came
in for an advance to piece out her insufficient revenues.190
Finally in February, 1842, the directors announced that
the bank had been compelled to suspend all its operations
for an indefinite period. This announcement was followed
by the rapid depreciation of its paper. By March 25, the
notes had fallen in value from eighty-five cents to fifty,191
while in April they were quoted at forty-four cents.192 In
May the directors discontinued the Chicago, Danville and
Jacksonville branches and moved their specie to the parent
bank. Instead of resumption, everything now pointed to
liquidation.193 It was confidently expected that the Bank
of Illinois would be in a position to resume specie pay-
ments in June along with the other western banks, but
188Ford, History of Illinois, 227. See, also, article from Belleville
Representative copied in Sangamo Journal, February 16, 1839.
189Ford, History of Illinois, 227.
™Ibid., 223.
19lSangamo Journal, March 25, 1842.
102Ibid., April 8, 1842.
™*Ibid., May 13, 1842.
104 THE DEVELOPMENT OF BANKING IN ILLINOIS [462
when the day agreed upon arrived the directors announced
that they had been compelled to follow the state bank's
example and had therefore ordered an indefinite cessation
of the bank's activities.194
During the year ending June 30, 1842, one hundred
and fifty-two other banks in the United States had closed
their doors and the rest had greatly reduced their circula-
tion in preparation for the resumption of specie payments.
This had led the people of the State of Illinois to rely all
the more upon the issues of the Illinois banks until they
too suspended operations and their paper became thor-
oughly discredited.195 Moreover, specie to the amount of
$798,998.69 lay inaccessible in their vaults. Large amounts
of their notes were being accumulated by speculators from
the easily frightened countrymen,196 so that by December,
1842, there was not enough money in circulation to carry
on the business of the community and resort was had to
payment in kind.197 For the first time the governor, auditor
and treasurer made use of the provision in the act of Janu-
ary 16, 1836, which authorized them at any time to publish
a proclamation forbidding the acceptance of state bank
paper in payment of public dues. Collectors were further
warned not to take the notes of the Shawneetown bank at
more than their current value.
At this point, which marks the close of their active
existence, the writer has brought together a sufficient num-
ber of the statements made by the two banks to the legisla-
ture to indicate : ( 1 ) The general character of their opera-
tions during the whole period of their activity; and (2)
the specific changes of policy that occurred from year to
year. The following table shows the balance sheet of the
state bank for the dates indicated :
194Goodspeed, pub., History of Gallatin, etc., Counties, 100.
ig*Senate Journal, 1842-43, p. 20.
19*Ibid., 43.
"7Ibid., 18, 19.
463]
BANKING AND INTERNAL IMPROVEMENTS
105
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106 THE DEVELOPMENT OF BANKING IN ILLINOIS [464
The first statement was made just three months after
the bank began business as a private institution. The
items in the balance sheet reveal the sources of the funds
with which the bank carried on its earlier operations as
well as the character of the accommodations extended to
borrowers. Subscribers to the $1,400,000 capital stock
had made payments to the amount of $278,739.11 in "specie
or its equivalent." Judging from the large amount of
•specie on hand payments must have been made generally
through that medium or with funds readily convertible into
specie. The $209,396.30 due from other banks is almost
entirely offset by the item, "real estate fund, $200,000."
The bank had recently borrowed this amount in the East
for the purpose of reloaning it on real estate, and the money
was still on deposit in a New York bank.198 Individual
'deposits form a larger percentage of total liabilities than
at any subsequent report. The bank had but a small supply
of notes at this time on account of a delay in the shipment
of the separate issues provided for each of the branches.199
Since the real estate fund was not yet available,
scarcely any loans had been made on real estate, the busi-
ness being confined to the purchase of bills of exchange and
the discounting of promissory notes.
By January, 1837, the date of the next statement given
in the above table, a great change had occurred. Almost
all the capital stock had been paid for and an additional
sum of $350,000 had been borrowed to re-lend on real estate
security. The specie reserve had been increased 225 per
cent, while the note issue had been expanded to seven times
the amount outstanding in 1835. The bank as the deposi-
tary for state funds had on hand $298,799.58 of the pro-
ceeds from the sale of Illinois and Michigan Canal bonds,
in addition to individual deposits of $475,265.63. The con-
stant drafts on the canal funds, however, made that item
of little benefit to the bank. The large circulation out-
198U. S., H. of R., 24 Cong., 2 Sess., Doc. no. 193, p. 603.
rf., 615.
4C5] BANKING AND INTERNAL IMPROVEMENTS 107
standing indicates that most of the loans and discounts
were received in the form of the bank's notes. The year
1836 had been marked by a great demand for accommoda-
tion on the part of land speculators and the bank had ex-
panded its loans very rapidly ; in fact, but a few weeks be-
fore this statement was made it had been compelled to
suspend its discount business until it could receive a ship-
ment of |280,000 in specie from New York and New Or-
leans. At this period the purchase of bills of exchange
arising from sales of produce in the South and East formed
a large part of the bank's business, for the reason that the
bills were readily converted into specie while the ordinary
loans or discounts at this period were considered as "slow"
assets.200 The connection of the bank with the lead and
pork speculation accounts for a large amount of the out-
standing accommodations.201
At the time of the next report recorded in the table,
the volume of the bank's business had reached the maxi-
mum point. The individual stockholders had paid in the
full amount of the first stock issue of f 1,400,000 and had
to their credit $144,655 on the second issue of one mil-
lion dollars. In the meantime the state had received its
f 2,100,000 in shares, making the total paid up capital
$3,644,655.00. However, instead of paying in cash for its
shares, the state had turned over to the bank $1,765,000 in
bonds. The bank had also been practically compelled to
buy $700,000 worth of canal bonds "and about $300,000
worth of other state securities, in order to retain the good
will of the legislature. Thus $2,763,750.00 of the bank's
resources were tied up in securities of questionable value
and $28,748.73 more had been advanced without interest
in order to help make up the deficit in the current expenses
of the state government.202 The proceeds of a recent sale
of internal improvement bonds had been deposited with
-^Special Report, Investigating Committee, 1836-37, p. 40.
-°lRef>orts of Session (Senate), 1839-40, pp. 266, 331, 332, et passim.
-o-Ibid., p. 263.
108 THE DEVELOPMENT OF BANKING IN ILLINOIS [466
the bank by the fund commissioners and had increased the
total deposits to over a million dollars; but the deposit
items were soon reduced to their normal amount and as the
difficulties of the bank increased, rapidly disappeared. The
circulation of the bank had more than doubled, but the re-
serve had increased but twenty -five per cent and was equal
to but thirteen per cent of the liabilities other than capital
stock. The heavy drafts made upon the bank by the state
enabled it to turn to a profitable use but $3,700,000 out of
its total resources of $8,900,000. The reckless advances
made to favorites had increased the discount item to the
amount of $3,287,770.60, but almost a million dollars of
this amount was pronounced worthless by Doctor Murphy
of the legislative investigating committee.203
The report for November 16, 1840, shows a marked
decline in the general activities of the state bank. But
$1,470 had been paid in by private stockholders, making a
total of $146,125 paid in on the million dollars stock issue
to individuals. The amount loaned on real estate had been
reduced and one hundred thousand dollars returned to the
original holders of the fund. A surplus of $90,000 had been
accumulated for emergencies but the deposits of over a
million dollars had shrunk to $107,000. In the face of un-
favorable conditions the note issue had been increased
while the reserve had decreased more than twenty-three
per cent. In their efforts to protect the bank from loss
the bank officials were compelled to bid in at judgment
sales large amounts of property which they had accepted
as security for loans. As may be seen from the "real estate"
item, nearly half a million dollars was tied up in this way.
The items, "Illinois securities, $2,101,899.59," and "Ad-
vances to the state, $243,397.07," indicate what a crushing
load the partnership had placed upon the bank's resources.
The first amount indicates that the bank had been able to
dispose of $600,000 worth of bonds, probably at a heavy
discount. The second shows the severe drain that was being
20*Reports of Session, (Senate), 1839-40, p. 263.
467] BANKING AND INTERNAL IMPROVEMENTS 109
made upon the bank to meet the state's current obligations,
$193,300.65 of it being for the ordinary expenses of govern-
ment while the remaining $50,096.42 represents advances
for labor and material employed in the internal improve-
ment projects.
The decrease of fifty per cent in discounts and bills of
exchange purchased as well as the accumulation of large
amounts in eastern banks and listed in the statement as a
part of the "$797,278.16 due from other banks" shows that
the bank was preparing to resume specie payment along
with the other banks of the West and South.204
By the time the next report was made, the bank was
hopelessly insolvent. It had practically suspended all op-
erations but the settlement of outstanding accounts.
$568,742.22 of the discounts were listed on the bank's books
as "suspended debt" and much of the remaining $826,344.85
as well as the loans on real estate later proved to be worth-
less. Through the foreclosure of mortgages it had come
into possession of over a million dollars' worth of land, but,
as will be seen, only a small part of this amount was
ever realized. Some of the bonds had been sold but the
state had continued to demand advances for current ex-
penses until $448,869.59 was due the bank. The bank had
suspended its operations since February, 1842, and its sup-
ply of specie remained intact. During the preceding period
of enforced resumption it had redeemed a large amount of
its paper but there was still almost a million and a half
outstanding. The large amount of undivided profits is due
to the fact that the bank had been forbidden by the legis-
lature to declare dividends during a suspension of specie
payments. The bank continued in a dormant condition
until February, 1843, when it went into liquidation under
conditions which will be considered presently.
™*Re ports of Session, 1840-1, 14.
110
THE DEVELOPMENT OF BANKING IN ILLINOIS
[468
The following table shows the condition of the Bank
of Illinois at various periods :
Aug. 5, 1837 Dec. i, 1838 Nov. 2, 1840 Nov. 12, 1842
Loans and discounts..$243,3i8.3i $1,005,568.84 $1,339,215.00 $1,170,619.87
Bills of exchange 15,444.76 78,850.61 270,738.40 201,843.76
Suspended debts 28,313.41 133,869.59
Advances to fund
commissioners 240,037.04
Advances for state
house 84197.00
Illinois securities 500,000.00 25,280.96 370,818.84
Insurance stock 1,500.00 11,200.00
Due from banks 41,727.93 517,121.58 308,539.63 44,853.48
Real estate 975-OO 11,331.91 62,426.95 98,661.24
Incidental expenses.... 29.25 28,874.95 6,566.67 6,892.05
Specie 158,610.34 306,708.05 413,255.38 307,040.47
Notes of other banks 45,450.00 82,772.00 63,147.00 2,605.00
Other assets 11,982.22
TOTAL 2,531,227.54 2,843,217.44 2,360,386.02
Capital 1,288,400.00 1,342,740.00 1,349,240.00
Circulation 64,846.00 712,204.00 1,262,414.00 757,848.00
United States de-
posits 39,795-90 40.00 40.00 40.00
Unclaimed dividend.... 404.00 707.44 1,908.00
Individual deposits 121,238.80 74998.60 90,552.30 88,634.69
Due to banks 108,665.62 31,211.41 11,684.15
Branch balances 15,533-35
Undivided profits 32,029.53 32,838.97 24,092.89
Surplus fund 4,489.52 67,179,97 126,938.29
The statement for August 5, 1837, shows the condition
of the bank shortly before its transformation from a pri-
vate into a quasi-state institution and its consequent en-
tanglement in the state's disordered finances. The bank at
that time enjoyed an excellent reputation and its balance
sheet shows that its creditors were well protected.205 As
special depositary for the receipts of the land office at
Shawneetown it was subjected to the supervision of the
secretary of the treasury. As has been indicated in another
20*Senate Journal, 1836-37, p. 352; U. S., Letter of the Secy, of the
Treas. on State Banks, 1838, pp. 778-83.
469] BANKING AND INTERNAL IMPROVEMENTS 111
connection, the bank as a private institution performed a
useful service in southeastern Illinois, confining its accom-
modations to lending on local real estate, discounting com-
mercial paper and purchasing bills of exchange from
commission men who had sold grain and live stock "down
the river."206
Before the next report listed in the above table ap-
peared, the state had subscribed for a million dollars'
worth of the bank's stock, paying $100,000 in cash and the
rest in bonds. At the time of the report, December 1, 1838,
the bank had disposed of $400,000 worth of the bonds.207
It will be seen that the partnership with the state brought
about a radical change in the bank's condition. The federal
government had withdrawn its deposits with the exception
of the nominal sum of forty dollars. The deposits of indi-
viduals had decreased forty per cent but the fund commis-
sioners had placed in the bank proceeds from the sale of
bonds to the amount of $309,996.27. Under the new regime
individual deposits ceased to play an important part in
the bank's affairs while the deposits made by various state
officials never remained in the bank's keeping for any length
of time. The large amount ($517,121.58) due from banks
may be accounted for by the fact that the bank was now
the fiscal agent of the state and was concerned in the trans-
fer of funds for the prosecution of the internal improve-
ment enterprises. The bank no longer confined its opera-
tions to southeastern Illinois, but with its branches in sev-
eral important business centers its activities covered a
large part of the state. In this way the great increase
in the volume of loans, discounts and bills of exchange, as
well as the greatly expanded note issue, may be explained.
The report of November 2, 1840, almost two yc;ns
later, shows an increased volume of business, but in reality
the bank was in a much weaker condition. $28,313.41 of its
assets were already listed as suspended debt and, as after-
wards developed, a large part of the loans and discounts
206 Page 82.
207Ford, History of Illinois, 190.
112 THE DEVELOPMENT OF BANKING IN ILLINOIS [470
were uncollectible. Officials in charge of the construction
of the new capitol building had obtained advances of $84,-
197 without interest, while similar favors had been granted
to the fund commissioners for the prosecution of internal
improvements. The Bank of Illinois had been more for-
tunate than the state bank in that it had been able to
dispose of all but |25,280.96 of its state bonds. The large
increase in the "real estate" item is probably due to the
erection of a banking house at Shawneetown at a cost,
when completed, of $80,000.208 The bank had suspended
specie payments in October, 1839, and had thus been able
to maintain its specie reserve pending resumption by all
the western banks in January, 1841.209 Meanwhile, the
outstanding circulation had increased steadily until it was
now greater by seventy-five per cent than in 1838. The
comparatively large amount of undivided profits represents
the earnings which had accumulated since the semi-annual
dividend of three per cent in June. It will be noted that
during the preceding two years a considerable sum had
been set aside by the directors as a surplus.
In June, 1842, as has been noted, the Bank of Illinois
suspended operations and soon after the date of the last
report in the table went into liquidation. Comparatively
little change had occurred in the status of loans and dis-
counts save that an increased amount had been charged
under "suspended debts." The $370,818.34 listed under
"Illinois securities" represents the scrip given to the bank
by the state in payment of the advances noted in the report
for 1840. The $11,982.22 listed in the table as other assets
represents the balances of the various branches. The bank
had withdrawn a considerable amount of its paper from
circulation and had increased its surplus to $126,938.29
but, as will be seen, its loans and discounts proved to be
entirely undependable when the final settlement was made.
In the gubernatorial campaign of 1842 former Gover-
nor Duncan became the candidate of the Whigs against
208Goodspeed, pub., History of Gallatin, etc., Counties, 100.
*09Sangamo Journal, December 19, 1840; Laws of Illinois, 1839-40,
P- IS-
471] BANKING AND INTERNAL IMPROVEMENTS 113
Judge Ford of the supreme court. The Democrats stigma-
tized Mr. Duncan as a British bank Whig and he in turn
cited his various acts while governor as consistently hostile
to the banks.210 The majority in both parties was in favor
of putting the banks into liquidation, but a few still clung
to the hope that the banks would soon resume their opera-
tions. Judge Ford, the Democratic candidate, took the
stand that a compromise should be made by which the state
and the banks would dissolve partnership, leaving them to
settle up their own affairs and go out of business.211 In
spite of the presence of a substantial element of radical
anti-bank Democrats in his party, Judge Ford was elected.
The sympathies of Mr. Carlin, the retiring governor, were
with the more radical wing of his party but, out of defer-
ence to Mr. Ford, he agreed to omit from his farewell mes-
sage the paragraphs recommending summary treatment
of the banks.212 In the meantime, however, he succumbed
to the influence of the anti-bank element and, much to Mr.
Ford's surprise, recommended to the legislature prompt
repeal of the banks' charters.213 He gave as his reason for
urging such action that the banks deserved no further
respite, for they had utterly failed to accomplish the pur-
pose for which they were created. He felt that the time
had come when the freedom of the individual citizen should
be asserted against the domination of vested interests. In
his inaugural message, Governor Ford presented the pos-
sible avenues of escape from the existing bank situation and
the consequences attached to each of them. The first was
to allow the banks to make an effort at resumption; the
second, to wind them up abruptly and withdraw their notes ;
the third, to effect a compromise by which the state bonds
held by the banks would be exchanged for the state's stock
in the banks, dollar for dollar. He argued that the first
plan would be feasible in the case of a small neighborhood
institution, but wholly impracticable in the case of banks
210Sangamo Journal, May 13, 1842.
2nFord, History of Illinois, 293; Alton Telegraph, April i, 1843.
212Ford, History of Illinois, 298.
213Senate Journal, 1842-43, p. 21.
114 THE DEVELOPMENT OP BANKING IN ILLINOIS [472
with a circulation of four and a half millions scattered
over the whole United States. In opposition to the second,
and in support of the third, plan he argued that if the
state's three millions in stock of suspended banks were
thrown upon the market very little could be realized and
the value of the shares of individuals would be practically
wiped out.214
Mr. Ford was opposed in the legislature by the radical
wing of his party under the leadership of Secretary of State
Trumbull. In fact, Mr. Truinbull became so active in his
opposition to a compromise with the banks that the gover-
nor removed him from office.215 In spite of the anti-bank
faction, however, a joint resolution was passed recommend-
ing the dissolution of the connection between the state and
the banks, and authorizing the governor, auditor and fund
commissioner to find out upon what basis a settlement
could be had.216 These officers entered into negotiations
with the banks and in a short time submitted the following
report from the state bank : The state was indebted to the
bank to the extent of $2,152,404.09,217 while the bank was
liable to the state for $2,100,000 invested in shares of stock.
The directors were willing to settle with the state by ex-
changing the bonds and other evidences of state indebted-
ness for stock, dollar for dollar. The relationship between
the two would thus be dissolved and the bank would be
allowed to continue as a private institution with only a
nominal amount of state shares to use as a defense against
attacks on its constitutionality.218 This plan was embodied
214Senate Journal, 1842-43, pp. 36 ff.
^^Independent Democrat (Springfield), March 20, 1843; Gerhard,
Illinois as it is, 103.
21*Laws of Illinois, 1842-43, p. 321.
217This amount was made up as follows :
Bonds $1,686,000.00
Scrip 17,534.50
Advances for current expenses 292,373.17
Advances to fund commissioners 156,496.42
$2,152,404.09
2lsRcports of Session (Senate), 1842-43, p. 94.
473] BANKING AND INTERNAL IMPROVEMENTS 115
in a bill drawn up by Governor Ford and presented by Mr,
McClernand, chairman of the House committee on finance.
In his speech, which was later published in pamphlet form,
Mr. McClernand showed in an able manner the unquestion-
able wisdom of a complete divorce between the state and
the banks. He estimated that the state had already paid
out |360,000 interest on the bonds used in buying bank
stock and had received in dividends but |207,500. If she
continued this relationship, at the present outlook she
would be called upon to meet the interest but with the
prospect of no dividends whatever.219 The bill was passed
by a vote of 107 to 4 and sent to the senate, where the oppo-
sition tried to kill it with amendments, but it was passed
without serious difficulty and received the approval of the
council of revision.
The act required the state bank to go into liquidation
at once and within thirty days to pay all its specie over its
counters, except fifteen thousand dollars, to depositors and
holders of notes. The officers of the bank were first to-
ascertain the ratio which the supply of specie on hand bore
to the amount of notes and deposits and no person was to
receive more than that proportion of nis claim in specie.
For the balance, he was to be given certificates good for
payment of debts to the bank and for the purchase of bank
land sold on execution. Four years were allowed for the
complete settlement of affairs and at the end of each year
a distribution of specie was to occur until all notes and
certificates were redeemed. Debtors, however, were to be
allowed to pay their obligations in five instalments. The
act created the office of state bank commissioner, whose
duties were as follows: (1) superintend the transactions
of the bank officers; (2) act as a state director; (3) obtain
information (by administering oaths, if necessary), and
stop all questionable practices with court injunction, if
needed. The bank was given only three days in which to
accept or reject the provisions of the law. If it accepted,
219Speech of J. A. McClernand : On Bill to Divorce Banks of Illinois
from State.
116 THE DEVELOPMENT OF BANKING IN ILLINOIS [474
it must deliver to the governor evidences of state indebted-
ness to the amount of $2,050,000 and receive from him a
like amount of its stock.220 The state directors were then
required to resign in favor of the state bank commissioner,
and if any differences should thereafter arise between the
state and the private directors the matter must be left to
arbitration.221 All the branches were to be closed at once
and all the bank's property appraised and sold at public
auction.222
The terms of the act were promptly approved by the
directors, who delivered to the governor $1,786,000 in bonds
and $287,501.51 in auditor's warrants, thereby reducing the
state debt by $2,073,501.51.223 When the governor and the
general assembly gathered in front of the state house and
made a bonfire of the bonds, the spirit of repudiation was
destroyed with them and the general feeling pervailed that
the state was on the road to recovery from the effects of six
years of folly.224 The legislature then proceeded to enact
several minor laws relating to the banks, chief among
which was the act of February 23, which provided that no
note issued by an Illinois bank should be received for public
dues and that holders of auditors' warrants should cease
to receive interest.225 The act of February 25 authorized
the treasurer to pay out all Illinois bank notes in his pos-
session at their current value, which at that time was less
than fifty cents on the dollar.226
Governor Ford appointed N. H. Purple state bank
commissioner and he assumed his duties, January 31. In
his examination of the bank's books he found that $476,-
220This left a nominal state holding of $50,000 in the bank.
221This method was resorted to on August 14, 1845, in order to settle
a claim held by the bank against the state. The arbitrators awarded the
bank $85,380.45. Reports of Session (H. of R.), 1846-47, p. 20.
222Lazf s of Illinois, 1842-43, pp. 21 ff.
223Greene and Thompson, Governors' Letter-Books, ii, 51-53.
224February 9, 1843. Senate Journal, 1844-45, P- 10; Greene and
Thompson, Governors' Letter-Books, ii, 54.
22SLaws of Illinois, 1842-43, p. 231.
231.
475] BANKING AND INTERNAL IMPROVEMENTS 117
772.53 in specie was available for paying noteholders and
depositors. Of this amount, he authorized the cashier to
pay $8,432 on a judgment and $15,000 was placed on re-
serve according to the terms of the liquidation act. The
remaining $453,349.53 was distributed among the depos-
itors and noteholders as their first dividend. By the time
Mr. Purple made his first report, December 2, 1844, the
bank had reduced the outstanding circulation from $1,-
430,308 to $229,901.00 and its total liabilities other than
capital stock to $870,000. In his judgment, the assets would
be sufficient to meet this obligation, but he offered no en-
couragement to the holders of the more than $1,500,000
worth of capital stock.227
In his message to the legislature, which met in Decem-
ber, 1844, Governor Ford commented on the great improve-
ment that had taken place. The depreciated notes of the
banks had been withdrawn from circulation and specie and
the paper of specie paying banks had succeeded them. A
period of economy had followed the reckless extravagance
and accumulation of indebtedness which characterized the
whole internal improvement era. Mr. Ford granted that
banks were necessary to a community with well established
business interests, but he was convinced from almost thirty
years of observation that Illinois succeeded better without
them. He cited the three successive failures in conducting
banks in the state as proof of his assertion and added that
so long as debtors were so indifferent about meeting their
obligations a bank was impossible.228
During the year 1845 some progress toward a final
settlement was made by the state bank, but its assets were
shrinking at an alarming rate. The expense account due
to salaries, taxes, fees and court costs left little for the
creditor. In his report for 1846 the commissioner listed
under available assets: bills and notes receivable, $432,-
856.35, suspended debts $460,098.21, loans $50,218.23, real
estate (nearly all of it pledged by bank debtors) $1,009,-
227 Reports of Session (H. of R.), 1844-45, P- 123.
228Senate Journal, 1844-45, P- IO.
118 THE DEVELOPMENT OF BANKING IN ILLINOIS [476
522.86, which, with $11,193.21 in coin, made a total of
$1,020,716.07. On the other hand, the liabilities other than
capital amounted to $663,073.62, so that if every dollar of
the assets could be realized there would be left for the
holders of $1,544,655 worth of stock but $357,642.45, not
to mention the fact that they had not received a dividend
in several years.229 The editor of the Alton Telegraph, in
commenting upon the situation, condemns the state for
causing what he considers an entirely unmerited loss to the
private stockholders. In proof of his assertion he cites the
fact that the private holders of shares were compelled to
pay for them with specie while for the greater part of the
state's stock there was placed in the bank at their face
value an issue of bonds worth but twenty cents on the dol-
lar. He calculated that if the state had' paid the same pro-
portion of specie as had been exacted from individuals the
bank could reimburse its shareholders to the extent of
seventy-eight cents on the dollar instead of twenty-six, the
former figures comparing favorably with the terms of settle-
ment of any western bank.230
Governor Ford may be pardoned for mildly boasting
in his farewell message in 1846 of the improvement in con-
ditions since his inauguration in 1842. At the earlier date
the state had become indebted for bank stock and internal
improvements to the extent of over fourteen millions. The
books of the treasurer showed a deficit of more than
$313,000 current expenses. The warrants of the auditor
were received at fifty cents on the dollar and the state's
credit had fallen into so great disrepute that the postmaster
at Springfield refused to deliver any mail to the state
house unless some one became personally liable for the
postage. The "credit" habit had taken such a hold on the
people that the liquidation of debts, both public and pri-
vate, seemed hopeless. By 1846 the annual shortage for
"^Reports of Session (H. of R.), 1846-47, p. 25.
2*°Alton Telegraph, July 4, 1846. The final outcome was that the
stockholders received nothing at all. Reports of Session (Senate), 1859,
p. 831.
477] BANKING AND INTERNAL IMPROVEMENTS 119
current expenses amounted to but $20,000. The warrants
of the auditor were received nearly at par in spite of the
fact that they no longer bore interest. The period of reck-
less banking had come to an end and a dependable cur-
rency had come in to take the place of depreciated notes.
The state debt had been reduced by three millions and pro-
vision had been made to pay five millions more as soon as
the canal should be completed. The general situation all
over the country had improved, as was evidenced by the
lively demand for land on the part of newly arrived set-
tlers.231
The feeling against banks was too universal to warrant
a candidate for governor running on a pro-bank platform.
Although the more intelligent citizens realized the need of
adequate banking facilities, the politicians in both parties
were eager to clear themselves of any responsibility for the
events of the last ten years and announced their opposition
to the incorporation of any more banks. Aside from a word
of commendation for the bank policy of the Ford adminis-
tration, Governor French in his inaugural address had little
to say on the subject.232 As the date set for the end of the
state bank's existence (March 4, 1847) approached, Mr.
French found that institution far from ready to wind up
its affairs. The officers of the bank had collected nearly
a million dollars, which was about all that the general con-
dition of its debtors seemed to permit. For this reason
only, the House committee on banks recommended that an
extension of time be granted, but that in so doing care
should be exercised "to leave no spark of vitality in the
bank or its charter."233 This was seized upon by the advo-
cates of the bank, however, as the psychological moment
for securing the revival of the state bank, and they pre-
sented a bill to recharter that institution for five years.
A surprisingly large minority was found to be in favor of
231Senate Journal, 1846-47, pp. 8 ff.
232Ibid., pp. 15 ff.
233Re ports of Session (H. of R.), 1846-47, p. 276.
120 THE DEVELOPMENT OF BANKING IN ILLINOIS [478
the measure,234 but it was compelled to give way to the act
of March 1, 1847, which extended the life of the bank until
November 1, 1848, for the sole purpose of settling its affairs.
It provided that if by that time the affairs of the bank were
still unsettled the governor should appoint three trustees
to wind up its business. The legislature was determined to
discourage any undue procrastination on the part of the
directors and incorporated several provisions calculated to
stimulate a speedy settlement: (1) It was provided that
the certificates given to note holders and depositors should
draw six per cent interest until paid; (2) All accounts due
the bank ceased to draw interest from the date of passage
of the act; (3) Any creditor was thereafter at liberty to
attach any of the bank's real estate and obtain judgment by
forced sale; (4) The local assessors were commanded to
tax all bank property within their jurisdiction, whereas
before it had been exempted and a capital stock tax paid
into the state treasury.235
When the first of November, 1848, arrived, the affairs
of the bank were far from settlement, so the governor ap-
pointed N. H. Ridgely, the cashier, Uri Manly and John.
Calhoun trustees to settle its affairs. Thereupon the di-
rectors resigned and assigned all the remaining assets to
the trustees.236 In their report to the governor in 1851,
the trustees stated that the assets of the bank would not
meet its liabilities and that the stock was utterly worthless.
During their tenure of office they had collected only $36,-
666.85 with which to pay obligations, other than capital
stock, to the extent of $454,190.96. The book value of the
real estate and the suspended debts due the bank was
$1,444,000, but only a small part of this amount could ever
be realized.237 Mr. Ridgely shortly afterwards offered to
Governor French $50,000 in state bonds in settlement of
the stock still held by the state. Governor French refused
zz*Chicago Democrat, February 23, 1847.
2*6Laws of Illinois, 1846-47, p. 20.
2MBankers Magazine, iii, 382.
2tlRet>orts of Session (Senate), 1851, pp. 137, 138.
479] BANKING AND INTERNAL IMPROVEMENTS 121
to take the bonds until he heard that a Cincinnati creditor
of the. bank was about to seize them. He then accepted
them, with the approval of the legislature, and the state's
connection with the bank was brought to an end.238
The settlement of the bank's affairs continued to drag
along year after year until in 1857 Governor Bissell at-
tempted to remove Messrs. Kidgely, Manly and Calhouu,
and appointed three new trustees. The old board, however,
refused to give up the property in their hands and Mr.
Bissell instituted quo warranto proceedings to oust them.
The court decided that with the surrender of the $50,000
of state stock the bank ceased to be subject to the state's
jurisdiction and that the removal of the trustees was pos-
sible only by judicial proceedings begun by a stockholder.
Governor Bissell was determined nevertheless that the state
should interfere in the conduct of the bank's affairs and
secured the appointment of a committee of the legislature
to inquire into the affairs of the trustees. They found that
Mr. Manly had ceased to take an active interest in the
bank's business and that Mr. Calhoun had moved to Kansas,
These gentlemen, however, continued to draw the annual
stipend of $1,000, but they each remitted $250 of this
amount to Mr. Ridgely for doing all the work.239 Mr.
Ridgely, when called to the stand, scored the committee for
intruding into the affairs of a private institution, but gave
them a fund of information about the progress that had
been made and the reasons for delay in settlement.
The liabilities still outstanding in 1859 — sixteen years
after the bank had gone into liquidation — amounted to
$150,000, while the more than $1,500,000 invested in capital
stock was a total loss to the investors. The assets amounted
to fifteen or twenty thousand dollars in cash and "some
old debts due for fifteen or twenty years and practically
worthless." The trustees had held office for eleven years,
but had been able to declare but one dividend of sixteen
and two-thirds per cent to the note holders and depositors.
238Rel>orts of Session, 1859, p. 841. Senate Journal, 1852, p. 13.
^Reports of Session (H. of R.), 1859, p. 838.
122 THE DEVELOPMENT OF BANKING IN ILLINOIS [480
Asked as to the trustees' plan for a final settlement, Mr.
Ridgely replied that they purposed to advertise all the
assets, chiefly land, for sale, but most of the land was very
undesirable or had a faulty title. Arrangements for such
a sale had all been completed when a Mr. Corwyth, the
holder of a large amount of outstanding certificates, at-
tached forty or fifty thousand dollars' worth of land in the
lead region and the sale had to be postponed. Mr. Eidgely's
explanation of the poor showing made by the trustees was
that property had been accepted years ago at ten times its
value and the notes of persons afterwards hopelessly insol-
vent had been freely discounted. One of the most interest-
ing episodes in the lengthy examination occurred when the
witness was questioned about the personal relations of the
trustees with the bank :
Mr. Mack : "You are reaching a low point in the avail-
able assets of this bank and yet there is a constant and con-
tinuous drain upon these assets of at least three thousand
dollars a year, to pay for the services of trustees when one
man could discharge the duties just as well as three."
Witness (Mr. Kidgely) : "There is no question of that.
Then again, I suppose that the creditors and individual
stockholders would rather have one trustee than three but
the legislature thought otherwise."
Mr. Mack: "But suppose that the legislature should
alter or repeal that law?"
Witness : "I don't think that they could touch it. ...
If we are under the supervision of the courts the legislature
has no control over us."
Mr. Mack: "Mr. Calhoun (who had moved out of the
state) could resign but you cannot remove him without
application to a court of chancery . . . and up to the time
the court removes him he continues to draw f 1,000 a year?"
Witness : "He never has drawn but f 750 a year. The
arrangement was that I should do all the work and take
half the pay ( f 1,500 )."240
The closing sale of the bank's real estate and chattels
was held in November, 1862, when auctions were held at
**0Rel>orts of Session (H. of R.), 1859, p. 838.
481] BANKING AND INTERNAL IMPROVEMENTS 123
Mineral Point, Wisconsin, and Springfield.241 Upon the
death of Mr. Ridgely, the trusteeship of the state bank was
handed over to Mr. William Ridgely, his son, who has been
called upon a number of times to help clear the title of
property in which the bank had an interest at some time.242
The history of the settlement of the affairs of the Bank
of Illinois at Shawneetown is somewhat similar to that of
the state bank. At the time when a committee of state
officers (1842) had inquired upon what terms the directors
of the Bank of Illinois would settle they replied that they
would buy the state's stock and pay for it with bonds ; but
instead of being compelled to go into liquidation they in-
sisted upon continuing as a private institution.243 The
legislature was determined that the bank should end its
existence and yet could not make any alterations in the
original charter without the bank's consent. In order to
induce the directors to accept a plan for a compromise with
the state similar to the one made with the state bank, and
yet compel them to go into liquidation, two laws were
passed. One, very stringent in its terms, provided for the
immediate assignment of all the bank's assets to three com-
missioners who were to be clothed with extraordinary
powers.244 The other was much more mild and provided
for an equitable settlement with the state and the liquida-
tion of the bank's affairs under the direction of its own
officials.245 The scheme of the legislature succeeded and
the bank committed itself to an agreement to turn over to
the governor $500,000 in evidences of state indebtedness
at once, and the remaining $500,000 within a year witli in-
terest at six per cent. The state was to retain three direc-
tors until the full amount was received. The governor
accepted the first payment and surrendered a like amount
of capital stock held by the state. The directors then pro-
2tlBonkers Magazine, xvii, 476.
242An example of this is the site of the Auditorium Hotel and Theater
in Chicago. Knox, History of Banking in the United States, 722.
-43Reports of Session, 1842-43, p. 201.
-**Laws of Illinois, 1842-43, p. 27.
30.
124 THE DEVELOPMENT OP BANKING IN ILLINOIS [482
ceeded to wind up the bank's business under about the same
provisions as had been laid down for the state bank.
The Bank of Illinois, as has been noted, had recently
changed hands and was now controlled by a group of men
who intended to make the most of their opportunity. Just
before the passage of the liquidation act they borrowed
$100,000 of the bank's specie and spent it in buying state
bonds for a few cents on the dollar. Among the bargains
obtained was one from Macalister and Stebbins who had
advanced $261,500 to the state and were still holding
$804,000 as security. Although the title to these bonds
was still vested in the state, the firm did not hesitate to
dispose of $333,000 worth of them to the Shawneetown
bankers. These men now repaid their $100,000 loan to
the bank with bonds, reaping a profit of more than seventy
cents on the dollar. But they did not stop at this point
for they owed other large amounts which they now settled
with bonds. When the time came for making a final settle-
ment with the state, these Macalister and Stebbins bonds
were tendered to Governor Ford at their face value. When
the governor refused to accept them the directors sought
to compel their acceptance by an order of the court but the
judge refused to issue a mandamus against a co-ordinate
branch of the government.246
When Governor Ford found that Macalister and Steb-
bins were unable to make a settlement with the state and
that the Shawneetown bank shares held by the state were
daily becoming more worthless, he received the disputed
bonds subject to the consent of the legislature. For a
time that body refused to give its sanction but later agreed
to accept the bonds at forty-eight cents on the dollar, leav-
ing a balance of $295,000 still due from the bank.247 In
December, 1844, after nearly two years devoted to settling
the bank's affairs, the state commissioner reported that
the cashier by paying $166,885.50 in specie to creditors
248Greene and Thompson, Governors' Letter-Books, ii, 106, 107.
247 Ibid., 120; Laws of Illinois, 1844-45, p. 246.
483] BANKING AND INTERNAL IMPROVEMENTS 125
and by matching debits against credits through the medium
of the notes and certificates, had settled more than a third
of the obligations other than capital stock. He estimated
that from a half to three-fourths of the assets were good.248
The legislature decided, however, to abolish the office of
commissioner and authorized the bank to place its property
in the hands of four assignees. As fast as any evidences
of state indebtedness came into the bank's hands, they
were to be turned over to the state in payment of the
$295,000 still due it in the exchange of bonds for stock.
If after four years the amount was not paid in full, the
state's claims were to be preferred over that of the stock-
holders to the extent of $20,000 if necessary. If, however,
at the time of the final settlement there still remained a
balance due the state, the assets were to be divided between
the state and the private stockholders in proportion to
the amount of their respective stock holdings at that
time.249 The assignees found that the four years time
allotted to them were entirely inadequate for the per-
formance of their task so the legislature advanced the date
of final settlement to January 1, 1851.250 After that date
the assignees were given the power to sue in their own
names; the assets and liabilities arising at Shawneetown
and Lawrenceville were accepted by Messrs. Caldwell and
Ryan and those at Jacksonville, Alton and Pekin by
Messrs. Dunlap and Smith. The assignees had not only
never paid the state any part of the $295,000 still due but
had allowed interest on it to accumulate to the extent of
$62,000.251 In 1852 the State Bank of Missouri united with
several other creditors in bringing a chancery suit in the
federal courts against the Bank of Illinois and its
assignees. The court ordered the assignees to turn over
the bank's affairs to three receivers who were instructed
to settle up the business as speedily as possible. The legis-
2i8Ref>orts of Session (H. of R.), 1844-45, P- 163.
249Laws of Illinois, 1844-45, P- 246.
250/&«/., 38.
2S1Reports of Session (Senate), 1849, p. 104.
126 THE DEVELOPMENT OP BANKING IN ILLINOIS [484
lature ratified this action by an act recognizing the receiv-
ers as the legal successors of the Bank of Illinois.252 Only
one of the receivers qualified for the office and in 1853 he
proceeded to sell at public auction the remaining effects of
the bank. The handsome four story building erected at a
cost of $80,000 was bought by Governor Matteson for
$15,000 and other property was disposed of at similar
sacrifices.253 The claims of the note holders and depositors
seem to have been settled in a fairly satisfactory way but
after the state had been reimbursed and the receivers' fees
and court costs paid there was nothing left for the 14,884
private stockholders.254
But little attention was paid by the press or the legis-
lature to the Bank of Cairo which was opened at Kaskaskia
by a group of investors who had obtained possession of its
unused territorial charter. As late as 1839 the bank bore
a good reputation and furnished a considerable portion of
the medium of exchange in south-western Illinois.235 A
large portion of its stock was held by Wright and Com-
pany, London bankers, as agents for various owners, hence
the policy of the bank could be dictated by the holders of
their proxies.256 The directors suspended specie payment
with the other western banks but on account of their lim-
ited clientage their action did not attract wide attention.257
In 1840 the Bank of Cairo was declared to be serving the
interests of its locality better than the other Illinois banks
were doing in their respective territories. It furnished
about seventy per cent of the small notes in circulation in
the region tributary to St. Louis, and thus supplied the
demand for change much more easily than its larger rivals'
who depended upon gold and silver or the notes of other
banks for amounts less than five dollars. The directors
made a specialty of the small notes, for the fact that they
362Laws of Illinois, 1851, p. 120.
258Goodspeed, pub., History of Gallatin, etc., Counties, 100.
254Chicago Democrat (weekly), September 10, 1853.
™*Sangamo Journal, December 24, 1839.
•^Chicago American, January 15, 1841.
257Greene and Thompson, Governors' Letter-Books, ii, 60, 61.
485] BANKING AND INTERNAL IMPROVEMENTS 127
were always in demand kept them from being presented for
redemption.258 In reply to the charge of a St. Louis paper
to the effect that the bank was not solvent, the cashier
published a statement in September, 1840, of the resources
and liabilities. At that time a circulation of $200,138.00
and deposits of about $13,000 constituted the only liabili-
ties in addition to the capital and surplus of $295,000. To
offset these items there was specie to the amount of $112,-
451.70, eastern exchange to the extent of $10,096.85 and
loans and discounts to the amount of about $350,000. Of
this last item more than $250,000 was created by the pur-
chase of bills of exchange arising from the shipment of
produce down the Mississippi.230 The bank later became
heavily involved in the operations of the Cairo City and
Canal Company, a corporation engaged in constructing
levees and other public works at Cairo, and its standing
began to be questioned.200 The result was that the notes
had depreciated five or ten per cent before those of the
other Illinois banks had begun to suffer a discount.201 A
year later, the affairs of the bank were in so hopeless a
condition that its paper was refused by brokers.202 In
February, 1843, the directors went into bankruptcy and
assigned all the bank's property, thereby virtually surren-
dering their charter.203 Thereupon the legislature by the
act of March 4, 1843, formally repealed the act of incorpor-
ation and provided a plan for the speedy settlement of the
bank's affairs.204 Governor Ford and the legislature were
criticized for the immediate repeal of the charter of the
Cairo bank when the other banks were allowed such liberal
terms of settlement. In his reply to these criticisms, the
governor justified the more severe treatment of the Bank
of Cairo by the fact that it had expanded its discounts
25*Chicago American, September 18, 1840.
™°Ibid., January 15 and 21, 1841.
a"Ibid.. July 2, 1841.
^-Chicago Democrat (weekly), June 8, 1842.
™3Ibid., March 21, 1843.
264 Laws of Illinois, 1842-43, p. 36.
128 THE DEVELOPMENT OF BANKING IN ILLINOIS [486
beyond all hope of redeeming the consequent issue of notes,
that it had operated under a charter of very doubtful
legality and that the directors had already virtually sur-
rendered the charter when they assigned their office and
placed the bank in the hands of receivers.263 It was at first
believed that with the specie in the vaults and the money
obtained from the sale of the Cairo Canal Company's prop-
erty the notes of the bank could be redeemed at par266 but
the late cashier of the bank disappeared with the whole
supply of specie. Some years later, enough was realized
from the remaining assets to redeem the notes at five cents
on the dollar.267
A history of the banking operations during the period
of internal improvements would not be complete without
some discussion of the more or less illegal banking opera-
tions that were carried on in Chicago.268 Up to 1835 there
was little demand for banking facilities in Chicago. Gor-
don S. Hubbard, a local merchant, kept a bank account at
Buffalo and supplied the other traders with drafts on the
East. As has already been noted, however, the population
and commercial importance of the village were increasing
at so rapid a rate that the directors of the state bank
located a branch in that place.269 The paper of the branch
bank furnished but a small part of the circulating medium,
however, for Chicago was rapidly becoming the commercial
center of the whole Northwest; hence the bills of Wiscon-
sin, Michigan and Indiana banks mingled freely with those
of the Illinois banks and helped to drive out what little
specie there was. For small change the merchants issued
tickets "good for groceries," "good for tobacco," "good for
a drink," etc., according to whatever business the person
issuing the notes followed.270 The legislature of 1835-36,
285Greene and Thompson, Governor? Letter-Books, ii, 60, 61.
2MChicago Democrat (weekly), March 21, 1843.
-^Illinois State Journal, February 2, 1862.
268This subject is treated at great length by Andreas in his History of
Chicago.
289Morris, History of the First National Bank of Chicago, 26.
2TOAndreas, History of Chicago, i, 531.
487] BANKING AND INTERNAL IMPROVEMENTS 129
in addition to chartering banks, had incorporated the Chi-
cago Marine and Fire Insurance Company with a capital
of $100,000. After granting to the company the usual
powers possessed by a concern of that character the priv-
ilege of receiving deposits and lending money was added
but the issue of paper "in the similitude of bank notes"
was strictly forbidden.271 In May, 1837, the directors of
the company announced that during the "deranged condi-
tion" attendant upon the panic of 1837 they would make
loans and receive deposits. Depositors were given certifi-
cates redeemable in specie on demand which, although they
bore no physical resemblance to bank notes, circulated
freely at par. When the company finally went into volun-
tary liquidation its notes were redeemed and retired with-
out the slightest loss or friction.272
In the meantime, Mr. George Smith of Aberdeen,
Scotland, visited Chicago and was so impressed with the
prospects of the city and the surrounding country that
upon his return to his native land he induced his friends to
unite with him in forming the Scottish Illinois Land and
Investment Company. They bought and sold Illinois real
estate, obtaining large returns until the panic of 1837
brought business to a standstill. Smith hastened to Amer-
ica to look after his interests and during his sojourn in
Chicago was so impressed with the success of the Chicago
Marine and Fire Insurance Company's operations that he
decided to conduct a similar enterprise. Accordingly he
obtained from the territorial legislature of Wisconsin the
charter of the Wisconsin Marine and Fire Insurance Com-
pany with a capital of $225,000, all of which was taken by
Smith and a small group of fellow countrymen. The head
office was nominally in Milwaukee, but Mr. Smith carried
on the greater part of his operations in Chicago.273 In spite
of the fact that the issue of certificates of deposit designed
to circulate as money was forbidden by its charter, the
company issued them freely, but maintained such high
21lLaws of Illinois, 1835-36, p. 30.
272Chicago American, May 16, 1837; Bankers' Magazine, xvi, 234.
273Chicago Democrat (weekly), January 29, 1846.
130 THE DEVELOPMENT OF BANKING IN ILLINOIS [488
business standards that its paper was in universal demand
and furnished a most acceptable addition to the medium of
exchange. So great were the quick assets of the firm that
the whole circulation could be taken up on short notice,
hence it was never found necessary to suspend specie pay-
ment.274 Beginning with the modest sum of $34,028 in
1841, the issue of certificates increased until in 1851 the
total outstanding circulation amounted to |1,470,000 and
numerous agencies had been established to facilitate re-
demption.275 In addition the business men of the territory
tributary to Chicago were provided with eastern funds at
one to two per cent.276 The success of the enterprise
aroused the opposition of the banks of the surrounding
states and territories and in 1852 the legislature of Wis-
consin was persuaded to force the company to retire its
circulation.277 Meanwhile Smith had organized banks in
Washington, D. C., and Atlanta, Georgia, and was issuing
and redeeming their paper in the Northwest. When Illi-
nois adopted the free banking law, which is to be discussed
in another place, Smith incorporated the Bank of America
under the Illinois law but its circulation was never very
extensive. By 1857, having acquired a large fortune with-
out a suspicion of crooked dealing attached to it he retired
to his native land.278
For many years unincorporated firms in Chicago and
elsewhere in the state had carried on a profitable banking
business, but they were not permitted under the constitu-
tion of 1818 to incorporate as banks or to issue notes, hence
they were usually classed as brokers. In conclusion, it
may be said that as a whole the record made by the private
banking institutions of this period, notwithstanding the
illegality of the note issues of some of them, is very much
more creditable than that made by the elaborately safe-
guarded state institutions.
"*Chicago American, September 28, 1841.
278Andreas, History of Chicago, i, 532.
"•Baldwin, History of La Salle County, 184.
"''Chicago Democrat (daily), February 9, 1852.
278Knox, History of Banking, 726, 742.
CHAPTER V
THE FREE BANKING SYSTEM OF ILLINOIS
In commenting upon the situation which existed in
Illinois just after the collapse of the banks in 1842 a writer
of the time remarks : "All the banks1 of Illinois have ceased
to be. Their history is brief; their story is instructive; and
the lesson taught will long be remembered."2 This state-
ment could have been applied with equal force to a number
of southern and western states whose banks had failed
under similar circumstances. In fact, the state bank of
Indiana was the only conspicuous success among the pro-
jects undertaken or fostered by a state.3 For nine years
after the failure of the Illinois banks, the Indiana bank
currency furnished that part of the circulating medium
which was considered both sound and lawful. A con-
siderable amount of paper from other states, especially
Michigan, was of unquestionable legality but of very doubt-
ful soundness; while the issues of the Wisconsin Marine
and Fire Insurance Company and other similar institutions
made up in soundness what they lacked in legality.4
The presence of such an assortment of money of all
degrees of goodness made it necessary for persons handling
it in business houses to be supplied with "bank note re-
porters," "counterfeit detectors" and other similar publi-
cations, while the general public relied upon the money
tables published in the newspapers.5
In so far as the banking functions other than note is-
sue were concerned, they were performed by the private
banking firms which had sprung up in all the principal
1This refers to the regularly incorporated banks of issue. There were
a number of private banking firms in the state.
2Brown, History of Illinois, 428.
3 White, Money and Banking, 333.
^Chicago Democrat, January 15, 1845; Bankers' Magazine, iii, 724.
*Niles Register, Ixviii, 272.
132 THE DEVELOPMENT OF BANKING IN ILLINOIS [490
towns. These establishments were subject to no supervi-
sion by the state and whenever the absence of competitors
permitted it, charged exorbitant rates of interest — the cus-
tomary rate paid by a central Illinois cattle grower, for
example, being twenty-four per cent.6 Those portions of
the state adjacent to Chicago, St. Louis or Vincennes were
more fortunate, however, and secured accommodations at
reasonable rates, but at best the situation in the state was
satisfactory neither to the bankers nor the public. Deposit
banking was practiced by an inconsequential minority,
hence the private bankers, under the necessity of paying
out currency to borrowers, either violated the law by issu-
ing their own paper or confined themselves to lending the
notes of other banks, while the public was subjected to a
constant risk in using a conglomeration of bank bills of
uncertain value. In the campaign of 1846 two radically
different remedies, both involving changes in the state con-
stitution, were proposed by the two political parties. The
Whigs favored the adoption of a general banking law under
which banks of issue could be chartered which would pro-
vide the people of the state with a plentiful supply of safe
currency. The Democrats, on the other hand, contended
that in view of the unhappy experiences of the past both
banks and bank paper should be forever banished from the
state. They argued that the ideal monetary situation,
namely, the exclusive use of specie, could never be brought
about so long as paper money was allowed to circulate.7
In his campaign speeches, Mr. Killpatrick, the Whig candi-
date for governor, took the position that it was a great
injustice to the business of the state that Illinois should be
the only state in the Union without banks of issue. He
pointed out to the voters the economic ills growing out of
the use of foreign bank notes, the chief of which was that
the people of Illinois were bearing the loss attendant upon
the use of such paper without receiving accommodation at
the banks which issued it. As for the establishment of an
exclusive specie system of money, Mr. Killpatrick argued
'Prince and Burnham, History of McLean County, ii, 760.
7 Alton Telegraph, January 24, 1846.
491] THE FREE BANK SYSTEM 133
that no law ever enacted could prevent the circulation of
bank notes to the exclusion of specie.8 The Democrats
nominated Augustus C. French, an anti-bank man, on a
platform which declared that the "resuscitation or rechar-
ter of any of the old banks . . . would be disastrous to the
best interests of the people of Illinois" and that "the cre-
ation of any new bank in Illinois, either as a state bank
or in any other form is uncalled for by the people."9
The Democratic party throughout the campaign took
advantage of the popular prejudice against all corpora-
tions. The average Illinoisian looked upon the act of incor-
poration as a mere "loophole for knavery" which permitted
the incorporators to do under its protection things which
they could not do as private individuals. He believed that
the incorporation of a bank of issue enabled the incorpor-
ators without money or credit of their own to reap a for-
tune from the resources of their patrons.10 Mr. French and
a Democratic legislature were chosen at the November elec-
tion and all hope of a general banking act seemed to have
disappeared. A new field of operation, however, was soon
opened for the friends of banks. The state had long out-
grown the old constitution of 1818, but none of the efforts
to provide a new one had thus far met with success. At
length the proposition to hold a constitutional convention
passed the legislature, was submitted to the people and
received the support of the voters of both parties. The
convention was in the hands of the Democrats, "nineteen-
twentieths"11 of whom were supposed to be opposed to all
banks, and yet a pro-bank Democrat was made president of
the convention and every effort to force the adoption of
constitutional prohibition of banks met with defeat.12
sAlton Telegraph, July 4, 1846.
^Chicago Democrat, March 10, 1846.
^Chicago Democrat, October 28, 1845.
^Illinois State Register, quoted by Illinois State Journal, November g,
i8S7.
12Alton Telegraph, June 29, and July 9, 1847; Miles' Register, Ixxii,
307 ; Chicago Democrat, June 29, 1847 ; Jacksonville Prairie Argus, quoted
by Alton Telegraph, July 16, 1847.
134 THE DEVELOPMENT OF BANKING IN ILLINOIS [492
The constitution was completed on the last day of
August, 1847, and the following March was submitted to
the people and adopted by a large majority. The follow-
ing sections relating to banking were included in the article
dealing with corporations:12
"No state bank shall hereafter be created, nor shall the
state own or be liable for any stock in any corporation or
joint stock association for banking purposes, to be here-
after created.
"The stockholders in every corporation, or joint stock
association for banking purposes, issuing bank notes, or
any kind of paper credits to circulate as money, shall be
individually responsible,14 to the amount of their respective
share or shares of stock in any such corporation or asso-
ciation, for all its debts and liabilities of every kind.
"No act of the general assembly, authorizing corpora-
rations or associations with banking powers,15 shall go into
effect, or in manner be in force unless the same shall be
submitted to the people at the general election next suc-
ceeding the passage of the same and be approved by a ma-
jority of all the votes cast at such election for and against
such law.16
The Democratic party still refused to commit itself in
favor of a banking law and at its convention in 1848 re-
nominated Governor French on a platform which did "re-
newedly declare" the party's opposition to all banks and
advocated the expulsion of paper money from the state.17
"Article X, Sections 3, 4 and 5 ; see Journal of Constitutional Conven-
tion, 1847, p. 564.
14To all the creditors of the bank. Decision of the supreme court of
Illinois in McCarthy vs. Lavasche. 89 Illinois, 270.
"The supreme court of Illinois in the case of Anthony vs. Intern.
Bank (93 Illinois, 225) and also in People vs. Lowenthal (93 Illinois, 191)
held that "banking powers" meant full banking powers and that an act of
incorporation granting all the usual powers of a bank except that of note
issue was not a banking act and need not be submitted to the voters.
16In the case of Smith vs. Ryan (34 Illinois, 364) it was held that
minor amendments to a banking law already approved by the people need
not be submitted.
"Illinois State Journal, May 4, 1858.
493] THE FREE BANK SYSTEM 135
The Whigs still looked to a central bank as the true remedy
for the currency ills of the nation, but as a measure of ex-
pediency they were willing to adopt any sound system of
local banks so long as there was no prospect of securing
a third United States Bank.
Governor French was re-elected and when the first
legislature chosen under the new constitution assembled,
January 1, 1848, he announced his intention of using his
newly acquired veto power, if necessary, to prevent the
adoption of a general banking act.18 Such action on his
part did not become necessary, for the only bill introduced
met an untimely end in the lower house.79
Now that the constitution permitted the chartering of
banks, the business men of the state began a determined
fight to secure favorable action from the next legislature.
Just before the opening of the next session of that body,
a convention was held in Chicago at which the representa-
tives of the leading commercial and financial interests of
the state drafted a memorial to the legislature and the gov-
ernor urging them to abandon their attitude of hostility
to banks and to provide the state with a system of banking
adequate to its needs.40 This time the appeal met with
success as far as the legislature was concerned and a gen-
eral banking system was passed for submission to the vot-
ers at the next general election.
The act was patterned after the free banking system
of New York and provided that the auditor of public ac-
counts should obtain a supply of circulating notes to be
issued to persons complying with its provisions. Each of
these notes was to be signed and numbered by the auditor
and the number entered upon an official register. Any
person or persons who desired to engage in the issue of
notes was required to deposit with the auditor bonds issued
(1) by the United States, (2) by any state which paid full
interest or (3) by the state of Illinois. The deposit of the
^Senate Journal, 1849, pp. 11 ff.
19House Journal, 1849, pp. 58, 73.
20Harper and Ravell, Fifty Years of Banking in Chicago, 83.
136 THE DEVELOPMENT OF BANKING IN ILLINOIS [494
first two classes of bonds entitled the owner to receive from
the auditor circulating notes to the full market value of
the bonds but not to exceed their par value; but Illinois
securities must be listed at twenty per cent less than their
average market value in New York during the preceding
six weeks. If any state failed to pay regularly six per
cent interest on its bonds, the auditor was required to de-
mand at least two dollars of its bonds for every dollar in
notes issued to the depositor. The securities were all listed
in triplicate, each list being signed by the auditor and the
depositors of the bonds. One of the lists was kept in the
state treasurer's office, one was retained by the auditor
and the third was given to the person making the deposit.21
The privilege of forming a banking association was
open to any number of persons but a minimum of fifty
thousand dollars' worth of capital stock must be sold before
beginning business. The certificate of incorporation grant-
ed to such associations specified the corporate name, place
of business, amount of capital stock, the names and resi-
dence of stockholders and the number of shares held by
each. This certificate entitled the holders to discount bills
and notes, receive deposits, buy gold and silver coin and
bills of exchange, lend money on real estate and personal
security, and circulate their notes as money.22 If, however,
a banking association failed to redeem its notes on demand,
the auditor was required after giving notice for ten days
in two New York City newspapers, to sell enough of the
bonds deposited by the association to enable him to redeem
the notes out of the proceeds of the sale, but in no case
could the state of Illinois be held liable for the redemption
of a bank's paper.23 If any note holder chose to do so, he
could cause a bank to be put into liquidation because of
its failure to redeem its paper. The procedure prescribed
was as follows : The note was to be "protested" by a notary
public and the protest sent to the auditor who in turn was
2lLaws of Illinois, 1851, p. 163, Sections 2 and 3.
22Ibid., Sections 4 and 9.
2*Ibid., Section 14.
495] THE FREE BANK SYSTEM 137
to notify the officers of the bank to pay the obligation in
question at once. If they failed to do so, the auditor was
to insert a notice' in one Springfield paper and one paper
in the place where the bank was located, to the effect that
he would redeem and retire all the notes of the bank. The
association was then to cease doing business except for the
purpose of settling its affairs under the direction of a re-
ceiver appointed by the courts. All assets were to be ap-
plied (1) to the redemption of notes, (2) to the payment of
all liabilities other than capital stock and (3) to reimburse
the shareholders.24 The stockholders were all to be held
individually responsible for the debts of the bank to an
amount equal to their respective holdings and the courts
\vere authorized to issue execution against each stockholder
in succession until the full amount of the judgment was
obtained.25 Any note upon which payment had been re-
fused drew interest at the rate of twelve and one-half per
cent until paid.26 Notes were redeemable only at the place
of business mentioned in the charter, and sufficient specie
must be kept on hand for their redemption.27 If the auditor
or a group of shareholders whose holdings aggregated three
thousand dollars desired an investigation of a bank's af-
fairs, the circuit judge of the county in which the bank
was located was required to institute such an investigation
and to publish his findings together with his opinion as to
the wisdom and honesty of the bank's management.28
The general supervision of the new system was placed
in the hands of three bank commissioners whose duties con-
sisted in examining the affairs of every incorporated bank
at least once a year and in inspecting the bonds on deposit
with the auditor. In case there was a shrinkage in the value
of any securities to such an extent that they no longer fur-
nished adequate protection to the note holder, the bank
was required to deposit additional bonds or withdraw a
24Laws of Illinois, 1851, pp. 163 ff., Sections 14 and 18.
2SIbid., Section 28.
20Ibid.f Section 18.
"Ibid., Section 19.
2*Ibid., Section 25.
138 THE DEVELOPMENT OF BANKING IN ILLINOIS [496
portion of its notes from circulation. As an additional
safeguard, a quarterly statement was required from every
incorporated bank, a copy of which must be published in a
local newspaper.29
Although the current rate of interest was ten per cent,
the legislature restricted the banks to a rate of seven per
cent, thereby compelling them to evade the law in order to
secure the current rate.30
The bill was sent to Governor French who returned it
with a vigorous veto message in which he noted the follow-
ing objections to the measure: (1) The bill should have
provided that a definite minimum amount of gold and silver
be kept on hand for the redemption of notes. (2) Instead
of a mere double liability provision the measure should
have required that every stockholder be liable to the full
amount of his private property. (3) A bond was a mere
evidence of indebtedness itself and was not a proper basis
for the creation of further evidences of indebtedness. If
a bond were worth its face value in gold then why not per-
mit the banks to deposit the gold itself as security for their
notes instead of resorting to a roundabout method which
amounted to the same thing? On the other hand if the
bonds were not as good as gold, then they did not provide
adequate security for the notes. (4) A bank could incorpo-
rate under the provisions of this bill and instead of issuing
notes based upon securities could act as the agent for some
foreign "wild cat'' enterprise. (5) The New York system
upon which the Illinois banking law was modeled could not
be pronounced a success since it had not yet been called
upon to weather a severe crisis.31
The same influences, however, which had forced the
original passage of the act again prevailed and it was re-
passed over the governor's veto.32 It was now necessary
that the measure should receive the approval of the voters
at a general election before it could become effective. The
z°Lau'S of Illinois, 1851, pp. 163 ff., Section 34.
30 1 bid.. Section 38.
^Reports of Session (H. of R.), 1851, p. 493.
^Chicago Daily Democrat, February 22, 1851.
497] THE FREE BANK SYSTEM 139
next general election would have occurred in November,
1852, but the legislature deprived all the county treasurers
of their offices and provided that their successors should
be elected in 1851. This change in the law made it possible
to submit the measure a year earlier.33 In spite of the
light vote and the hostility of the Democratic newspapers,
the law was adopted by a substantial majority.34
Although the system provided was an improvement
over the chaotic conditions of the past, there was ample
room for abuses to creep in and the experience of subse-
quent years shows that unscrupulous persons made the
most of these defects in the law. Banks could issue an un-
limited amount of currency without reference to the needs
of the community so long as the requisite amount of securi-
ties was deposited with the auditor. The place of issue
named on the notes could be located in the most inaccessible
portion of the state and the notes circulated as far as possi-
ble from it. Finally, there was no provision made for the
actual payment of a dollar of the fifty thousand dollars'
worth of capital stock prescribed as a minimum.
Notwithstanding the ease with which bonds could be
obtained and circulating notes received there was not a
single application filed with the auditor for several months
after the passage of the act, a fact which led the editor of
the Chicago Democrat, an opponent of the system, to boast
that the law would soon become a dead letter.35 The aud-
itor had signified his willingness to issue bank notes to the
full value of any six per cent bonds of the United States
or the states of New York, Ohio, Kentucky and Virginia,
none of which was quoted at less than 106 on the New
York stock market. He also offered to receive Illinois
securities at eighty per cent of their market price.30 It was
the stringency of these bond deposit provisions of the act
S3Laws of Illinois, 1851, p. 144.
34Memoirs of Gustave Koerner, \, 564.
^Chicago Daily Democrat, January 28, 1852.
"Thompson's Bank Note Reporter, quoted in the Chicago Tribune,
February 13, 1852.
140 THE DEVELOPMENT OF BANKING IN ILLINOIS [498
which discouraged the formation of banking associations
by even those bankers who had favored the passage of the
general law.37
During the course of the year 1852, however, seventeen
banks were organized in various parts of the state and
deposited bonds with a market value of $1,649,100, in re-
turn for which they were permitted to receive $1,142,544.83
in notes. Of this amount, $1,129,622 was actually in cir-
culation at the close of the year.38 In the case of several
of the new associations the business of a private firm was
taken over and the lawful bank notes substituted for illegal
issues.39 On the other hand, some of the private bankers
were so audacious as to issue "shin plasters" with which
to buy bonds for the purpose of obtaining lawful currency
from the auditor. In fact, several Chicago institutions
after becoming incorporated are said to have prepared an
issue of illegal notes exactly like their legal issue and to
have paid out the two kinds indiscriminately.40
The law abiding bankers wrere determined to rid the
state of illegal currency, but met with little success in their
efforts to discredit such universally acceptable paper as
that of George Smith. Moreover, the law compelled them
to redeem their notes at par while Smith continued to
charge a one per cent premium for gold. Consequently,
Smith's paper continued to circulate without interruption
while the notes of the incorporated banks were constantly
presented for redemption. At length the incorporated
banking associations appealed to the courts (December,
1852) and secured indictments against six banks and
George Smith's firm, the Wisconsin Marine and Fire Insur-
ance Company.41 The cases dragged through the courts
and were eventually abandoned but the efforts of the bank-
ing associations in another quarter were more successful.
87Bross, History of Chicago, 42.
S6Biennial Report of the Auditor of Public Accounts, 1853, p. 24.
89 Andreas, History of Chicago, i, 534.
*°Chicago Democrat, May 2, 1852, September 3, 1852.
*llbid., December 25, 1852. This effort to stamp out illegal note issue
was known as "the bank war."
499] THE FREE BANK SYSTEM 141
When the legislature met in 1853 pressure was brought
to bear both by the stock bankers and the auditor to secure
an amendment to the banking act which would protect
legitimate note issues.42 At the same time, however, Gov-
ernor French in his farewell message pronounced the law a
failure in that instead of ridding the state of "wild cat''
currency it seemed to foster a spirit of law breaking. He
did not, however, urge the repeal of the act, but recom-
mended that the defects in the system be corrected.43 In his
inaugural address Governor Matteson joined with the aud-
itor and the stock bankers in asking for legislation which
would give the banking associations who tried to obey the
law adequate protection against unauthorized note issues.44
The legislature fell short of correcting all the defects
in the original bank law, but the supplementary act of 1853
was passed which afforded some relief to legitimate bank-
ing. The following are the principal provisions of the act :
No certificate of incorporation could be issued until at
least $50,000 in bonds had actually been placed in the
auditor's hands and if the amount of deposit should fall
below $50,000 the bank ipso facto forfeited its charter. A
heavy penalty was provided for the issue within the state
of anything designed to pass as money, other than the bills
authorized by the general banking law. Foreign notes were
not allowed to be circulated unless they were of a denom-
ination of five dollars or more and were issued by a regu-
larly authorized specie paying bank of a state, territory
or Canadian province.43 The last named portion of the
act was not taken seriously, although proceedings were
instituted against offenders in various parts of the state.
The high premium on silver coins after 1834 made it neces-
sary to have a large amount of small bills to take their
place and merchants and bankers continued to make use
of foreign small notes in spite of the heavy penalty in-
*zReports of Session (Senate), 1853, p. 33.
43 Senate Journal, 1853, p. 14.
"Reports of Session (Senate), 1853, p. 23.
**Laws of Illinois, 1853, p. 38.
142 THE DEVELOPMENT OF BANKING IN ILLINOIS [500
volved. Moreover, when a note holder turned a small note
from another state over to a bank for collection he was
compelled to submit to a charge for this service so that
most persons continued to use the notes and run the risk of
prosecution.46
As a result of the co-operation of the Board of Brokers
of New York City with similar organizations in St. Louis
and Chicago the provision of the act of 1853 against
unauthorized domestic note issues was very effectively en-
forced. The Wisconsin Marine and Fire Insurance Com-
pany and similar institutions gave up the fight and with-
drew their notes from circulation.47 The currency of the
stock banks came into more general use and for a brief time
enjoyed a good reputation both at homo and on Wall Street,
where it was accepted at a discount of but three-fourths of
one per cent.48
At the time of the bank commissioners' report for May,
1854, thirty-one banks had been organized, with an author-
ized capital of seventeen millions and- securities in the
auditor's hands valued at $2,650,987.62. Of this amount,
$1,844,500 worth consisted of the bonds of Virginia, Geor-
gia, Missouri, Ohio, Wisconsin, Kentucky and Tennessee,
all of which states paid six per cent interest regularly. On
these bonds, notes were issued up to the full par value.
The remainder of the deposits was made up of California
bonds quoted at eighty cents on the dollar, on which the
auditor issued notes at the rate of fifty cents on the dollar,
and of Illinois securities of various kinds and values, on
which notes were issued to the extent of eighty per cent of
the New York stock market quotation. As far as evidences
of state indebtedness could be considered a sufficient secur-
ity for bank note circulation the issues of the Illinois banks
seemed to be amply protected. In fact, with the rapid im-
**Chicago Democrat (weekly), August 6, 1853; Bankers Magazine, ix,
102.
"Ibid., vii, 846.
^Thompson's Bank Note Reporter, quoted by Chicago Democrat
(weekly), April 2, 1853; Clark's Counterfeit Detector, quoted by Bankers
Magazine, vii, 846; New York Herald, cited in ibid., 739.
501] THE FREE BANK SYSTEM 143
provement in the credit of the state there was no longer
any reason for the discrimination against Illinois securi-
ties.
In lieu of the regular tax assessments the stock banks
«v*ere assessed by the bank commissioners upon loans, dis
counts and bond deposits. When the commissioners called
upon the banks for a statement as to the amount of these
items, but nine of the banks made any return at all upon
loans and discounts, the rest reporting merely the minimum
of fifty thousand dollars in bonds required for incorpora-
tion. This singular state of affairs was due to the fact that
the latter banks as such were not doing a loan and discount
business at all. They were incorporated in order to secure
the right to issue notes and then loaned the entire issue
as private brokers and not as banking associations. In
this way the seven per cent maximum interest rate could be
exceeded and the tax upon loans and discounts evaded. In
fact, a sort of an endless chain could be started by first
obtaining bonds, next, procuring notes with them, next,
obtaining more bonds with the notes, and so on as long as
the association's ability to keep its notes in circulation
permitted the process to continue. That this practice,
however, did not as yet prevail to any considerable degree
is evidenced by the fact that but few of the banks had de-
posited more than the minimum amount of securities.49
The commissioners reported that the notes of foreign
banks continued to furnish almost seventy per cent of the
entire volume of paper in circulation in Illinois, in spite of
the increased issues of the stock banks. This situation they
accounted for in two ways: (1) Some Illinois bankers had
put their paper into circulation outside of the state in order
to postpone the necessity of redeeming it; (2) The amount
of notes which the stock banks found it profitable to issue
fell far short of the total demand for money.80
Notwithstanding the ease with which a banking asso-
ciation could be formed, the efficient supervision of the aud-
49Report of Bank Commissioners, in Bankers Magazine, ix, 102 ff.
144 THE DEVELOPMENT OF BANKING IN ILLINOIS [502
itor in connection with the character of securities offered
limited the number of applications for charters and in-
spired public confidence in the system. During the summer
of 1854, however, the stock banks received their
first shock, which was caused by a panic of short duration
but characterized as the worst since 1837. The trouble was
precipitated by a too heavy drain upon the money market
due to extensive railroad construction in the Middle West.
The crisis spread to the stock market, with the result that
Virginia and Missouri bonds, which formed the larger
part of the securities deposited by the Illinois banks, fell
to ninety-five and ninety -three cents on the dollar, respect-
ively. Suddenly a feeling of distrust seized the holders of
Illinois currency and as a result large amounts of it were
presented for redemption. The banks were wholly unpre-
pared to meet their obligations and a number were com-
pelled to suspend specie payments.51 The bank commis-
sioners sought to allay the feeling against the stock bank
notes by assuring the note holders that every bill was amply
secured and that no one need sustain any Joss. The process
of waiting for the auditor to dispose of securities in New
York and then call in the bills for redemption was too se-
vere a tax upon the patience and comprehension of many
persons, who disposed of their notes to brokers at a heavy
discount.52
In their report for January, 1855, the bank commission-
ers indicated to the legislature the necessity of eliminating
at least two weak points in the general banking law: (1)
The abolition of the seven per cent maximum interest rate,
so that the banks would be induced to carry on their busi-
ness in a regular and legal manner; (2) The requirement
that a definite minimum amount of specie be kept on hand
for purposes of note redemption.53 The legislature, how-
ever, made but one slight change in the banking law of 1851
and that had to do with facilitating the retirement of the
^Bankers Magazine, ix, 493.
™Ibid.
"Report of Bank Commissioners, in Bankers Magazine, ix, 751.
503] THE FREE BANK SYSTEM 145
notes of banks in liquidation. Any association which was
about to retire its notes and wind up its affairs was re-
quired to certify this fact to the auditor. It was then en-
titled to receive from him a proper proportion of its securi-
ties in return for every $1000 package of notes forwarded
to him. If the association desired to go out of business
before all its notes were redeemed it must deposit with the
auditor sufficient specie to cover all the outstanding issue.54
The auditor's report for the biennium ending Novem-
ber 30, 1854, showed that the banks had made a fairly good
recovery from the effects of the panic. Three of them had
closed their doors permanently, while five of the remaining
thirty-two institutions were still in a state of suspension
but had not yet been forced into liquidation. The total
circulation then outstanding amounted to |2,649,341, as
security for which there were on deposit state bonds valued
at $3,170,529.55.
The five banks which had not yet resumed specie pay-
ments were notified that if they did not do so within
sixteen days after the passage of the supplementary act of
1855 their portion of the securities on deposit would be
sold by the auditor and their notes redeemed at his office.
They were unable to comply with the notice and were
compelled to close their doors.55
The number of banks and the amount of notes out-
standing continued to increase until in 1856 there was a
total of $6,480,873 outstanding, an increase of fifty per cent
over 1854.56 In spite of this fact, the Illinois stock bank
notes formed the minor part of the circulating medium of
the state. As an illustration of the varied character of the
money in use in Illinois in 1855-56, Andreas cites the case
of a conductor on the Chicago, Burlington and Quincy
Railroad who on collecting $203 from his passengers re-
ceived the notes of twenty-three different banks. Of this
amount, all but $21 was the issue of banks outside of
**Laws of Illinois, 1855, p. 32.
^Bankers Magazine, ix, 822.
^Reports of Session (Senate), 1857, p. 139.
146 THE DEVELOPMENT OF BANKING IN ILLINOIS [504
Illinois, |115, or more than half, being the notes of Geor-
gia banks.57
The predominance of Georgia paper was not a mere
accident, but was due to the fact that several banks in that
state were owned by citizens of Chicago. After the passage
of the act of 1853, and the successful campaign against
illegal note issue, George Smith had opened two banks in
Georgia for the sole purpose of furnishing notes for circu-
lation in the territory tributary to Chicago, unhampered
by bond deposit restrictions.58 In like manner Preston and
Company of Chicago issued from their office in that city
the notes of their bank at Dalton, Georgia. Both the
Smith and the Preston notes were in great demand, being
convertible into eastern exchange at three-fourths of one
per cent and into gold at one per cent upon being presented
at the Chicago offices of the banks.59 The stock bankers
of Chicago did all in their power to drive the Georgia banks
out of existence. At one time they kept up a continuous
run for four months and presented a total of two million
dollars for redemption. On another occasion Elihu B.
Washburne was sent to Georgia with a large quantity of
notes, for the purpose of driving the Smith banks out of
business, but they succeeded in redeeming the whole
amount presented.60 Unfortunately there was much paper
issued in the South which was not so easily redeemable.
The fact that the Smith paper bore so good a reputation
encouraged the issue of "wild cat" imitations of it. The
business men of Chicago, being the worst sufferers from
the notes, united in an appeal to the banks to stop handling
Georgia paper of all kinds. Some of the banks agreed to
co-operate in the matter but the rest were too heavily
involved in one way or another to admit of their doing
likewise.61 By 1858, however, the business of issuing and
"Andreas, History of Chicago, i, 547.
B8Andreas gives a detailed account of George Smith's various activi-
ties; see i, 547, ii, 617 et passim.
^Chicago Daily Democratic Press, January 6, 1856.
60Andreas, History of Chicago, ii, 617.
01Ibid., i, 546; Bankers Magazine, ix, 572.
505] THE FREE BANK SYSTEM 147
lending notes had ceased to yield the large returns of for-
mer days and Smith retired his large Georgia issues and
returned to Scotland.
Agencies similar to those maintained in Chicago were
maintained by several Nebraska banks in Galesburg, Pe-
oria, Macoinb and other cities and villages, the difference
being that the western currency was wholly unreliable. A
favorite scheme of these frontier institutions was to per-
suade a number of persons in Illinois to take stock in the
enterprise and thereby obtain the right to a certain amount
of its bank notes. These notes the stockholder could use
as he saw fit, but he became personally liable for their
redemption. For a time the various stockholders, by agree-
ing to circulate one another's notes, succeeded in keeping
them in circulation, but the crisis of 1857 put an end to
"Brownville," "Platte Valley," "Nehama Valley" and other
similar "wild cat" issues and left a number of hitherto
prosperous Illinois farmers and merchants the wiser and
poorer for the experience they had had.02
In his report for November 30, 1856, the auditor stated
that since the passage of the amendment of 1855 requiring
banks to file notice of their intention to retire from busi-
ness, nine banks had taken such action. Three of them had
done so of their own free will and had retired their notes,
or deposited with the auditor sufficient specie for their,
redemption. The rest had been forced to go out of business
for failing to redeem their notes. The |6,500,000 in out-
standing notes was secured by bonds with a par value of
$7,645,590.24 and an estimated cash value of $6,663,389.
The system had been in operation for five years and up to
that time the bonds in the auditor's possession had proved
to be more than adequate for the redemption of the out-
standing notes.63 However, the new governor, Mr. Bissell,
did not believe that this showing was any criterion as to
the future of the stock banks. He granted that thus far the
82Gale and Gale, History of Knox County, 6/8; Clarke, History of
McDonough County, 161 ; Rice, History of Peoria County, i, 448.
^Reports of Session (Senate), 1857, p. 50.
148 THE DEVELOPMENT OF BANKING IN ILLINOIS [506
system had come up to all reasonable expectations but he
expressed the fear lest in time of great financial distress,
the holders of notes would suffer a heavy loss.64
More than two-thirds of the notes of the Illinois banks
were secured by Missouri state bonds and the fact that that
state was suffering from an internal improvement mania
similar to the one which seized the State of Illinois about
twenty years before caused considerable alarm. The pub-
lic debt of Missouri already exceeded nineteen millions and
the legislature was contemplating an additional bond issue
of several millions, an act which would inevitably bring
about a marked decline in the value of the securities
already outstanding.65 Moreover, in addition to this
threatened danger to the stock banking system, several of
the influences which led to the commercial disasters of the
year 1857 and 1858 were already in evidence. By Febru-
ary, 1857, five of the downstate banks were in so precarious
a condition from over-expansion of loans and discounts
that Chicago and St. Louis brokers flatly refused to accept
their notes. A period of prosperity and expansion of busi-
ness activities had led to excessive issues of notes and too
little scrutiny of the security offered by borrowers.66
Nearly all the stock banks hastened to retire a part of their
note issue in order to fortify themselves against the
approaching storm. As a result of their action, the out-
standing circulation was reduced from f 6,480,000 on Janu-
ary 1, to 15,500,000 on March 24, 1857.67
The legislature, then in session, corrected some more
of the defects in the banking law by enacting the amend-
ment of February 14, 1857. It was specified that every
incorporated banking house must do business solely in the
name of the bank and at the place named on its notes and
in the certificate of organization. The practice of locating
banks in inaccessible spots was forbidden by a clause
requiring that the office of a bank must be situated in a
"Reports of Session (Senate), 1857, p. 20.
^Illinois State Journal, January 19, 20, 1857.
9tBankers Magazine, xi, 622, 827.
"Illinois State Journal, March 25, 1857.
507] THE FREE BANK SYSTEM 149
settlement containing not less than two hundred persons.
This provision was aimed at such institutions as the Bank
of Southern Illinois which had been established at Bolton,
a town containing but one family and located in an out
of the way part of Williamson County. Banks of this
kind issued their notes in more populous parts of the state
with the assurance that few persons would ever take the
pains to present them at the bank for redemption.68 The
act also definitely prohibited the practice of "wearing out"
persons presenting notes for redemption. Some banks in
order to discourage the return of their notes in any con-
siderable quantity compelled the note holder to present his
bills one at a time and received payment in small change.
Thereafter, if a person presenting a note for redemption
were accorded such treatment, he could have the notes
"protested" by a notary and mail it to the auditor who was
required to place the bank in liquidation if it refused to
make full payment to the noteholder within ten days. The
practice of starting a stock bank by merely borrowing the
requisite amount of securities and paying for them with
the notes received in exchange for them was brought to an
end by a provision that no more charters were to be granted
until the auditor had been convinced that there had been
paid into the bank a bona fide cash capital of fifty thousand
dollars. As an encouragement to legitimate banking the
legal rate of interest that might be charged by stock banks
was increased from seven to ten per cent. Finally, the
amendment put the bonds of Illinois and those of other
states which paid six per cent interest regularly upon the
same footing. Thereafter notes would be issued up to
ninety per cent of the actual market value of any stock
placed on deposit. This provision, while it increased ma-
terially the margin of security behind the notes of banks
depositing the bonds of other states, at the same time
removed the unreasonable discrimination which had
existed against the securities of Illinois.69
"Cairo Gazette, quoted in Illinois State Journal, December 24, 1857.
"Laws of Illinois, 1857, p. 23.
150 THE DEVELOPMENT OF BANKING IN ILLINOIS [508
At the same session of the legislature an act was passed
for the purpose of facilitating the settlement of affairs of
defunct banks. Thereafter, if the note holders and other
creditors of an insolvent bank did not present their claims
within three years the bank was released from further
obligation.70
Salutary as the amendments to the banking law were,
they were of no avail in warding off the panic which spread
westward in the spring and summer of 1857. The period
of six years during which the stock banking system had
been in operation had been one of remarkable development
for the State of Illinois. Taxable wealth had increased
almost three fold; a number of important railways had
been constructed, money was plentiful and land values
were highly inflated. The reaction had now set in in
earnest and the Chicago bankers tried to prevent a collapse
of the banking system by agreeing to receive the notes of
Illinois banks at par even though during the period from
September, 1857, to March, 1858, the price of eastern
exchange in terms of Illinois paper was never less than two
per cent. In fact, in October, 1857, it reached a maximum
of ten per cent.71
As the situation in the New York stock market be-
came more acute, state bonds began to decline with such
rapidity that the Illinois auditor was compelled on May 8,
1857, to call upon practically every bank for additional
securities amounting to from two to six per cent of their
capital.72 On July 5, the bank commissioners announced
that there was no need for alarm since the notes in circu-
lation amounting to $5,535,690 were secured by over six
million dollars worth of bonds, and all but two of the banks
had complied with the request for more securities. One
of the two delinquents, the People's Bank of Carmi, had
$127,500 worth of bonds with which to redeem $110,300,
but the note holders of the Stock Security Bank of Danville
were not so fortunate, its securities having depreciated so
10Laws of Illinois, 1857, p. 220.
71 Chicago Tribune, January i, 1861.
72Illinois State Journal, May 9, June 25, 1857; Reports of Session,
1859, P. 193-
509] THE FREE BANK SYSTEM 151
rapidly that the holders of its notes received but eighty-
eight and a fourth cents on the dollar. This was the first
instance in the history of the stock bank system of Illinois
where the proceeds from the sale of bonds on deposit had
not been adequate to reimburse the holders of notes, dollar
for dollar.73
The value of securities continuing to decline, the com-
missioners called upon twenty-seven banks for still further
bond deposits to be made within the next ninety days.
This action evoked a vigorous protest on the part of bank-
ers and merchants and pressure was brought to bear upon
the commission to secure an extension of time, but the
members by a vote of two to one decided to adhere to the
terms of the original bill. At the expiration of the ninety
day period, all but three of the banks had reduced their
circulation within the legal limit or had deposited a suf-
ficient amount of additional securities. The bonds of the
three delinquent institutions were promptly sold and a
sufficient amount of specie obtained for them to enable the
auditor to redeem the outstanding notes in full.74 Had the
rest of the banks failed to readjust their bond deposits or
circulation, the auditor would have been compelled to
dump upon the market at a most inopportune time over
four and a half millions in securities, $2,738,000 worth of
which was issued by the State of Missouri whose credit was
now almost ruined. In addition to voting extravagant
loans the Missouri legislature now threatened to adjourn
without providing for the interest payment on the enor-
mous state debt, a proceeding which would have sealed the
doom of the Illinois banking system. Fortunately, the
threat was not carried out and Missouri bonds, for the time
being, ceased their rapid decline in value.75
Meanwhile the merchants of St. Louis became alarmed
at the frequent and extensive demands made upon the
Illinois banks for additional securities and voted to reject
all the Illinois currency offered at their counters. Since
a large part of the state was tributary to that city the
7SRef>orts of Session, 1859, p. 193 ; Bankers Magazine, xii, 239.
^Reports of Session, 1857, p. 193.
7sState Journal, October 12, 1857; November 19, 1857.
152 THE DEVELOPMENT OF BANKING IN ILLINOIS [510
effect of such action was quite as serious as if it had been
taken by a group of Illinois merchants. One of the bank
commissioners hastened to St. Louis and explained to a
gathering of business men the character of the Illinois
system and the exact condition of the banks at that time.
This action, together with the influence of the more con-
servative newspapers of St. Louis brought a restoration of
confidence and in a few days the paper of Illinois banks
was again accepted by the merchants and bankers of that
city.76 The latter agreed to furnish specie for Illinois cur-
rency at the rate of ninety to ninety-five cents on the dol-
lar. During the few days when Illinois paper was dis-
credited, St. Louis "note shavers" reaped a harvest by
buying up the notes from the public at from ten to fifteen
per cent discount.77
By January 1, 1858, the Illinois banks had made a
fairly complete recovery from the crisis. Only a small
number of them had been compelled to go into liquidation,
although the failures in other lines of business, especially
in Chicago, had been very extensive. In that city business
was for a time completely paralyzed, speculators were
ruined and the progress of the city retarded for two years.
The rest of the state had not been so seriously affected by
the crisis, there being but 199 failures out of 11,459 busi-
ness enterprises, whereas in Chicago 117 out of 1,350 estab-
lishments had failed.78 By April, 1858, eastern exchange
could be. had for one and one-half per cent premium and
the protesting of Illinois currency had fallen off materially.
Everything pointed to a rapid return to normal condi-
tions.79
Unfortunately the adverse weather conditions of the
summer of 1858 left the Illinois farmer with a short grain
crop of most inferior quality.80 As a result there ensued
™St. Louis Democrat, quoted by Illinois State Journal, October 21, 1857.
"St. Louis Intelligencer, October 23, 1857, quoted by ibid. St. Louis
Democrat, November 2, 1857, quoted by ibid. Illinois State Journal, Oc-
tober 21, November 9, 1857.
^Bankers Magazine, xii, 681.
"Illinois State Journal, April 27, 1858.
ioChicago Tribune, January i, 1861.
511] THE FREE BANK SYSTEM 153
a depression m the down state portion of Illinois more
severe than that of the year before. The banks, however,
were doing business on a much more conservative basis
and were not seriously affected ; in fact, after two years of
hard times, only six of the fifty-four banks had gone out
of existence. All these institutions, with the exception of
the Danville bank, had redeemed their notes without loss
to the holders.81
In the report of the secretary of the treasury of the
United States on the state of the finances for the year
ending June 30, I860,82 Illinois was at the bottom of the
list of states in the amount of specie held by her banks in
proportion to outstanding circulation. The $269,585 re-
ported by Illinois banks amounted to but 4.25 per cent of
their note issue, whereas the average for the entire country
was 23.08 per cent. In reviewing the banking situation
as judged by the data in the secretary's report, Mr. W. M.
Gouge said of Illinois :83 "In that state, debt is piled upon
debt. Funded debt forms the capital of banks and floating
debt the currency. ... A traveler relates that the redemp-
tion of notes with specie is little more than nominal. But
the people having confidence in their 'ultimate security' as
founded on state stock pass them freely."
The report of the bank commissioners in January,
1859, took a different view of the situation than Mr. Gouge
had done. They were of the opinion that a system which
had withstood the test of two successive years of financial
depression should receive the stamp of approval from the
public. In fact, the commissioners were convinced that
the banks of the state "enjoy today a larger share of public
confidence than at any former period." The recent experi-
ence witli the bonds of Missouri and other states whose
credit had been badly shaken during the panic led the
commissioners to recommend that Illinois bonds be given
the preference over those of other states. They also asked
that they be given authority to prosecute offenders against
61Reports of Session, 1859, p. 193.
82U. S., 36 Cong., i Sess., Senate, Ex. Doc., no. 3, 368.
aaBankers Magazine, xiv, 7.
154 THE DEVELOPMENT OF BANKING IN ILLINOIS [512
the foreign small note law, in view of the fact that prose-
cuting attorneys did not take the act seriously.84
Governor Bissell in his message pronounced the bank-
ing system "in the main satisfactory" and cited the fact
that but six banks out of fifty-four had failed, as proof of
his statement. He recommended no changes in the banking
act, save that the banks be compelled to substitute new bills
for the mass of filthy and almost unrecognizable paper
which they continued to circulate. He did, however, ex-
press a wish that the legislature could prevent citizens
of other states from "depreciating" Illinois paper. As it
was, a traveler from Illinois was compelled to submit to a
discount of his bank notes as soon as he crossed the line
into another state.85
A considerable minority of the members of the legisla-
ture favored a bill which provided for the establishment of
"specie banks," entirely independent of the existing system,
their idea being that in addition to banks of issue there
should be state banks which made a specialty of furnishing
eastern exchange at reasonable rates. Most of the mem-
bers, however, were of the opinion that the existing banking
system had acquitted itself so well that it should be left
as it was, so no banking measures were passed during the
1859 session. Had the members followed the recommenda-
tion of the commissioners in regard to giving Illinois bonds
the preference over those of other states, the break down
of the banking system two years later would undoubtedly
have been prevented. Illinois wras not only meeting the
interest on her indebtedness promptly but had reduced her
outstanding obligations to eleven millions. Moreover, the
constitution of 1848 forbade the increase of the state debt
in time of peace unless such action were first approved by
a majority of the voters at a general election.86 On the
other hand, a large part of the securities purchased by
newly formed associations were those of the State of Mis-
souri, whose debt already exceeded twenty-five millions,
although she had a population of less than a million and
**Reports of Session, 1859, p. 193.
^Senate Journal, 1859, p. 23.
••Article iii, Section 37.
513] THE FREE BANK SYSTEM 155
was far behind Illinois in the extent of material progress
made.87 The general sentiment throughout Illinois seems
to have been that the banking system was as satisfactory
as it could be made and that the general assembly should
let well enough alone.88
The year 1859 witnessed a recovery from the hard
times of the preceeding two years, but one marked by cau-
tion. Legitimate enterprises in Chicago were able to
obtain plenty of eastern capital at ten per cent, but only the
best unincumbered property was accepted as security.89
However, neither Chicago nor the rest of the state could
be said to be prosperous, although they had learned the
much needed lesson that "patience, prudence and economy
are the most trustworthy roads to fortune.''90 The grain
crop of 1859 was of good quality and brought a good price
but it was not a very large one, hence the condition of the
eastern exchange market was little better than it had been
in 1857 and 1858.91 The year 1860, on the other hand, was
the most prosperous one in the history of Illinois agricul-
ture up to that time. The crops of that year were unpar-
alleled in size and excellence, while the extraordinary de-
mands on the part of European countries kept up prices.
Eastern exchange soon returned to normal and bank cur-
rency was in great demand for crop moving.02 As a result
the issues of the existing banks were expanded and many
new associations were formed.93
The natural expansion of the currency, however, was
interfered with by another slump in the value of the Mis-
souri bonds which necessitated a call being made upon
eighteen of the banks for the deposit of more securities or
the retirement of a portion of their notes.94 The banks
succeeded in adjusting their issues to the amount of securi-
87 Illinois State Journal, January 17, 1859.
^Missouri Democrat, February 5, 1859.
^Bankers Magazine, xiii, 625.
90/&irf., xiv, 410.
91Chicago Tribune, January i, 1861.
*2Ibid.
93Reports of Session (Senate), 1861, p. 331.
04Illinois State Journal, February 20, 1860.
156 THE DEVELOPMENT OF BANKING IN ILLINOIS [514
ties on deposit but a number of the down state institutions
had practically suspended specie payment, for the Chicago
banks were protesting down state issues at the rate of
eighty to one hundred thousand dollars a month and send-
ing them in to the auditor for redemption.95 Many country
bankers, in fact, purposely allowed their notes to go to
protest in the belief that it was less expensive to sacrifice
their securities than to keep in their vaults a large amount
of specie.96 To many of the down state bankers the custom
of the large Chicago institutions of sending a messenger
to the country banks with a large amount of bills for re-
demption was exceedingly annoying. In spite of the act
of 1857 which forbade such a practice, the Reaper's Bank
of Fairfield undertook to discourage the presentation of
its notes by "tiring out" Chicago bank messengers. On
one occasion, when a representative of Willard and
Atkins of Chicago presented for redemption at the bank's
counter several packages, each containing five or six
hundred dollars worth of the bank's notes, the cashier pro-
ceeded to redeem the notes one by one with five and ten
cent pieces, stopping frequently to attend to other duties.
Finding at the close of the day's business that but one
hundred and fifty dollars worth of notes had been re-
deemed, the messenger had the rest of the notes protested
for non-payment and the auditor was called upon to place
the bank in liquidation. The officers of the bank resorted
to injunction proceedings and the case was ultimately de-
cided by the Illinois supreme court. Here it was held that
payment of notes "on demand" meant that the holder is
entitled to present all his notes simultaneously and receive
specie for them in a lump sum.97
As the winter of 1860-61 approached and the political
situation in the South became more acute, southern securi-
ties began to decline and the price of eastern exchange in
terms of Illinois currency rose correspondingly.98 The
9*McElroy's Reporter, April 10, 1860.
"Bankers Magazine, xv, 411.
97See Reaper's Bank vs. Willard, 24 Illinois, 433. Bankers Magazine,
xiv, 487.
^Chicago Tribune, January i, 1861.
515] THE FREE BANK SYSTEM 157
bank commissioners, upon examining the securities in the
hands of the auditor, found it necessary to call upon
twenty-two banks for additional deposits, the amounts in
the different cases varying from f 2,062 to f 51,070. They
were granted the usual forty days grace in which to make
good the deficiency or retire a part of their circulation.
The Chicago bankers, however, were too concerned over the
prospects of civil war to be willing to await the action of
the delinquent banks and immediately agreed to refuse
to receive the notes of any of the banks under call until
they had been restored to good standing. The period of
grace would have expired January 1, 1861, but the com-
missioners, late in December, extended the time to March
20." The holders of the notes of these banks made vigorous
objection to the commissioners' action on the ground that
the notes were being subjected to a discount of fifteen to
twenty per cent, whereas if the banks were closed at once
and their bonds sold, an average of ninety-two cents on the
dollar would be realized. The commissioners, however,
were of the opinion that any effort to sell a large number of
bonds on the New York market would only result in a
heavy loss to the note holders.100 Furthermore, between
November 20, the date of the original call, and December
20, the date when the extension of time was granted, the
securities of nearly every state in the Union had depreci-
ated to such an extent that out of justice to the twenty-two
banks under call it would have been necessary to require
nearly every bank in the state to deposit additional
bonds.101
The beginning of the year 1861 marks so distinct a
transition in the history of stock banks, that a review of the
development of the system up to that time, and an analysis
of its internal workings as revealed in the statements issued
by the state officers will not be out of place at this point.
"Reports of Session (Senate), 1861, p. 333; Illinois State Journal,
November 20, 21, 1860.
100Reports of Session (Senate), 1861, p. 333; Illinois State Journal,
December 21, 22, 1860; St. Louis Democrat, December 8, 1860.
lolReports of Session (Senate), 1861, p. 333.
158 THE DEVELOPMENT OF BANKING IN ILLINOIS [516
The system had been given a fair trial for nine years and
the officers to whom the work of supervision had been
entrusted had performed their duties with ability and
honesty. The note issues had been so fully protected by
state and federal bonds that out of fourteen banks which
had gone into liquidation the securities of but one fell
short of providing for the redemption in full of all the out-
standing issue. And yet the system could not have been
pronounced a successful one. In the first place, the notes
were circulated with a fair degree of ease within the state,
but they were subjected to a discount as soon as they were
carried beyond its borders.102 In the next place, the legis-
lature failed to make any discrimination in favor of Illi-
nois securities and banking associations bought up at a
bargain bonds of unstable value which failed utterly to
afford the needed protection to note holders when the Civil
War broke out.103 Lastly, at no time during their exist-
ence had the banks kept on hand an adequate supply of
specie for the redemption of their notes. Instead of facili-
tating the process of redemption, they sought to make it as
difficult as possible. No system of note issue could be
termed successful in which the holders of notes in the great
majority of cases wrere compelled to resort to the cumber-
some process of protest and sale of securities in order to
exchange them for specie.104
The following table105 contains the aggregate state-
ments of the ninety-four banks reporting their condition
to the -bank commissioners, October 1, 1860, and the balance
sheets of (1) a large Chicago bank, (2) the largest down
state bank, (3) one of the small group of conservative
country banks, (4) one of the more numerous banking
associations organized solely to obtain notes and lend them
through some third party:
102Champaign Gazette, November 28, 1860.
™3Senate Journal, 1863, p. 22.
104Bankers Magazine, xiv, 7.
105The data given in the table were obtained from Reports of Session
(Senate), 1861, p. 376.
517] THE
FREE BANK SYSTEM
159
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160 THE DEVELOPMENT OF BANKING IN ILLINOIS [518
The aggregate statement for October 1, 1860, shows the
condition of the banks when the stock system under the
stimulus of prosperous times had attained its maximum
growth. In addition to the ninety-four banks from which
returns were received there were eighteen others in exist-
ence at this time. They evidently had not complied with
the provision of the act calling for a quarterly statement
of their condition. The fact that f 12,264,580.74 in securi-
ties had been deposited as a protection to but $11,010,837
in notes furnished a safe margin against the ordinary
fluctuations of the stock market. More than half of this
amount of securities had been deposited since the amend-
ment of 1857, hence the bank making the deposit received
in notes but ninety per cent of the market value of its
bonds.106
Practically every item in the statement reveals the
fact that but few of the banks were conducting a regular
banking business. Only fourteen of them owned even
enough real estate to provide a site for their place of busi-
ness making a total amount of but $116,551.40 invested in
this way.107 The item, "notes of other banks," represents
the holdings of but thirty-two institutions out of the ninety-
four, while but thirty-eight banks reported any indebted-
ness to other banks. Furthermore, but fourteen banks
carried on a loan and discount business of their own, which
accounts for the fact that but $540,876.28 of the nineteen
millions of resources was used in this manner.108 On the
other hand, nearly all the banks had large amounts on
deposit with other banks, this item alone aggregating
$3,793,752.22. All these facts go to show that most of the
stock banks were mere devices for obtaining a supply of
paper money to use in connection with a private banking
business where the restrictions placed upon an incorporated
concern could be avoided. Closely related to the deposits
in other banks is the $1,950,244.39 due from banks and
lMReports of Session (Senate), 1859, p. 206.
"Ubid., 1861, pp. 376 ff.
519] THE FREE BANK SYSTEM 161
individuals, aside from loans and discounts. A large part
of this amount probably can be attributed to the purchase
of bills of exchange arising from the sale of produce.109
The remainder of the banks' note issues were invested
in bonds which served as security for a further note issue
and so on as long as the necessity of redeeming the notes
in specie could be avoided. That most of the banks had no
intention of redeeming their notes in specie can be seen
from the fact that but sixty-one of them kept any specie
on hand at all and half of these had a thousand dollars
or less. The |302,905.26 on hand at the time of the report
was less than three per cent of the outstanding circula-
tion,110 not to mention the other demand obligations. The
minor items in the aggregate statement column are either
self explanatory or furnish little indication as to their
exact character.111
In the second column is represented a peculiar bal-
ance sheet, that of the Marine Bank of Chicago. It will be
noted that the association had invested but $55,753.83 of
its half a million dollars of paid up capital in stocks and on
this security had issued but $31,795 in notes. One could
conclude from this much of the bank's statement that it
was carrying on a discount and deposit business but a
glance at the other items shows that this is not the case.
Deposits aggregate but $19,378.35 and no loans and dis-
counts whatever were made. By far the largest part of the
bank's funds had been loaned through another bank or
banks, but no use was made of the "endless chain" device of
securing a large supply of bank notes by using the exist-
ing issue for the purchase of more bonds. The Chicago
banks found other lines of banking more profitable than
note issue under a restrictive law.112
™*Reports of Session (Senate), 1861, pp. 376 ff.
110The banks of Indiana, at the close of 1860, had $2,296,648 in specie
and but $5,755»2Oi in notes; and those of Ohio $2,377,466 in specie and
$8,143,611 in notes. U. S. Comptroller of the Currency, Report, 1876,
p. 116.
^Reports of Session (Senate), 1861, pp. 376 ff.
112Andreas, History of Chicago, ii, 617.
162 THE DEVELOPMENT OF BANKING IN ILLINOIS [520
In marked contrast with the Marine Bank is the
largest of all the stock banks and the successor of the old
Bank of Illinois, the State Bank of Shawneetown. In
spite of its high sounding name, however, it had no official
connection with the state. It had invested all its capital in
bonds, obtained notes for them and with these had obtained
more bonds as security for more notes. The fll,500
charged to real estate is of interest in that it probably rep-
resents the "present worth" of the $80,000 structure
erected by the old Bank of Illinois. It will be seen that
practically all the rest of the bank's funds were loaned out
through other agencies or invested in bonds.
The McLean County Bank is one of the very few stock
banks which conducted their affairs about as a small bank
issue would do at the present time. The capital stock had
been invested in securities and the full amount of notes
issued thereon, but in comparison with other stock banks, a
large amount of discount business had been carried on and
an unusual amount of deposits received. The specie reserve
while small was much larger than the average. This bank
was one of the few to survive the outbreak of the rebel-
lion.113
The bank maintained by Tinkham and Company, pri-
vate bankers of Chicago, affords an example of the type of
institution wThich was established in an out of the way
place for the sole purpose of obtaining a supply of cur-
rency. The incorporators of the enterprise made no effort
to carry on a banking business at the place mentioned in
the charter and on the notes, but circulated their currency
in Chicago or some other distant point where there was lit-
tle chance of anyone taking the trouble to find the bank's
counter. Tinkham and Company had evidently used about
$50,000 of the note issue in connection with their private
banking business and had invested the rest in bonds.
The table as a whole shows that the stock bank system,
instead of providing the state with adequate and dependable
^Reports of Session (Senate), 1863, i, 215.
521] THE FREE BANK SYSTEM 163
facilities for all lines of banking, had created a machine
for the issue of paper money.
As the secession movement advanced and the prospect
of war became more of a certainty, it was generally agreed
that some radical steps must be taken to bolster up the cur-
rency system of Illinois. Governor Yates in his inaugural
message joined with the bank commissioners in recom-
mending: (1) the limitation of the choice of securities
to the bonds of Illinois and the United States, (2) that
one or more cities of the state should be selected as central
redemption points where, for a small fee, the notes of a
stock bank could be exchanged for specie.114 The Chicago
bankers were especially desirous of securing the adoption
of the latter recommendation and a convention of bank
presidents and cashiers was called by the bankers of that
city to formulate plans for a redemption system which
would obviate the necessity of sending messengers to re-
mote parts of the state to the counters of country banks.
The Chicago banks urged each country association to retire
one-tenth of its circulation and to open a redemption agency
at Springfield or Chicago. As compensation to the down
state banks for retiring a portion of their notes and selling
the securities back of them at such an unfavorable time, the
Chicago banks agreed to pay an extra premium of five per
cent for all New York sight exchange delivered to them
by country banks during the ten days following the making
of the agreement. As a hint concerning what would follow
upon an unfavorable response to the proposition, the Chi-
cago bankers mentioned the fact that they had on hand
large amounts of the notes of down state banks which were
likely to be presented for redemption at any time. When
the convention of presidents and cashiers met, January,
1861, with representatives present from thirty-seven banks,
a system of mutual redemption was formulated, but the
banks of themselves could accomplish little as the existence
ll4Reports of Session (Senate), 1861, pp, 21, 335.
164 THE DEVELOPMENT OF BANKING IN ILLINOIS [522
of all except a few of them was threatened by the probable
secession of the southern states.115
The question of banking reform was therefore one
with which the legislature alone was competent to deal and
it responded to the appeal of the Chicago bankers by enact-
ing an amendment, February 14, 1861, entitled "An act to
amend the general banking law to afford greater security
to the public." First of all, it was provided that thereafter
all securities deposited with the auditor must be those of
Illinois or the United States. In order to encourage the
existing banks to dispose of their southern bonds, the act
provided that if securities which had been below par for
two years were exchanged for securities which had been at
par for two years, notes should be issued on the latter up
to their full face value, until September, 1861. After that
date, the usual ten per cent margin between notes and
securities should be required. Any bank whose circulation
exceeded the lawful limit was given sixty days in which to
make good the deficiency in securities. If at the end of that
time there was still a deficiency, the auditor was required
to place the bank in liquidation. Before the passage of this
act the auditor had been required to sell the bonds of banks
whose notes had been protested and to pay the note holders
in specie out of the proceeds. The present act provided
that the auditor should redeem the notes directly with
bonds and let the note holder dispose of the bonds as best
he could.
The act further provided for the adoptiorrof a central
redemption system. All banks organized thereafter wrere
required to maintain an agency in Springfield or Chicago,
while the older banks were induced to do so by being offered
a special thirty day exemption from being placed in liqui-
dation in case their notes were protested. Furthermore,
persons protesting the notes of any existing bank which
should establish an agency were entitled to but six per
cent interest instead of the usual twelve per cent which had
been paid to holders of protested notes. The agency thus
116Illinois State Journal, December 19, 1860. January 17, 1861 ; Bankers
Magazine, xiv, 581 ; Chicago Tribune, January i, 1861.
523] THE FREE BANK SYSTEM 165
provided for could be either a separate or joint affair and
was permitted to charge three-fourths of one per cent com-
mission during the year 1861 and after that not more than
one-half of one per cent.
In order to keep the public more closely in touch with
the banking situation, the governor and commissioners
were required to issue quarterly statements of the value of
the securities then on deposit. Every six months, the banks
were required to give to the public a complete list of their
stockholders and the amount of their respective holdings.
As a check upon the excessive issue of notes, it was speci-
fied that no bank could thereafter issue an amount greater
than three times the actual paid up capital. The minimum
capital requirement was reduced to twenty-five thousand
dollars in actual cash. Thereafter banks could not be estab-
lished in any town containing less than one thousand in-
habitants, an exception being made of county seats. The
charters of all banks having no bona fide officers or place
of doing business were declared forfeited and lending
through a third party was punishable by forfeiture of all
interest due. Whether a bank chose to issue notes or not,
it was required to keep a minimum bond deposit of $5,000
in the auditor's office.116
In addition to placing the existing system upon a
firmer basis so far as could be done without infringing upon
the rights of banks already in operation, the legislature
provided for the establishment of a great central banking
system entirely distinct from the stock banks. The state
bank of Indiana had met with such success and its paper
bore so high a reputation that the Illinois legislature be-
lieved that by providing a similar institution the currency
ills of the state would be at an end. The new institution
was to be called the Union Bank of Illinois and was to con-
tinue its existence for twenty-five years after its charter
had been approved at the next general election. Three
months after the ratification of the act by the people, the
bank commissioners were to divide the state into not more
119Laws of Illinois, 1861, pp. 39 ff.
166 THE DEVELOPMENT OF BANKING IN ILLINOIS [524
than thirty districts, in each of which a branch bank was to
be located. The capital was not to exceed ten millions and
every branch was to be held responsible for the debts of
the others. The maximum rate of interest was fixed at
seven per cent. The system was referred to as the "specie
system" of banking as contrasted with the "stock system."
The only safeguard provided for demand notes was that
they could not be issued in excess of twice the amount of
paid up capital.117
At the next general election in November, 1862, the
bill was submitted to the people and rejected by a large
vote.118 The reasons assigned for its unpopularity were:
(1) It was expected that the greenbacks would furnish an
ample supply of good paper money. (2) A constitutional
convention was about to meet and the general opinion was
that the solution of the banking question should be left to
it.119 (3) The collapse of the stock banking system, about
to be described, occurred between the passage of the act and
the date of its submission to the people. As a consequence,
a strong feeling against banks was engendered.120
It will be remembered that the bank commissioners in
November, 1860, called upon twenty-two of the one hundred
and twelve stock banks in the state for more securities.
When the final date on which the deficiency could be made
good arrived (March 20), seventeen of the banks with an
aggregate circulation of $2,726,795 were still unable to
comply with the call and were placed in liquidation.
Meanwhile the southern states had one by one seceded
from the Union and their bonds in the hands of the Illinois
auditor to the amount of $9,467,500 had rapidly declined in
value. Missouri bonds, which were quoted at 67 cents on
the dollar on April 1, by April 17 had fallen to 51 cents
and the prospect of a recovery daily grew less. The notes
of thirty-two stock banks were refused by the Chicago
bankers, and the paper of as many more banks was on very
117 Laws of Illinois, 1861, p. 53.
ll*Bankers Magazine, xv, 539, 554.
ll9Champaign Gazette, October 30, 1861.
120IlHnois State Journal, June 26, 1861.
525] THE FREE BANK SYSTEM 167
dangerous ground.121 Outside of Chicago, notes which
were discredited in that city were accepted at fifty cents
on the dollar, while the paper of other banks circulated
about as usual. The down state business men protested
that the strictness of the Chicago bankers was merely
making a bad situation worse by hastening the ruin of
the great majority of the country banks.122 The merchants
of Chicago adopted a more liberal policy toward the stock
banks. Believing that the war would be of short duration,
they agreed to take at par all Illinois paper not already
discredited by Chicago bankers,123 but this arrangement
became intolerable when New York exchange reached a
premium of twenty per cent and threatened to go higher.
When on May 15, Missouri stock had fallen to 35 cents on
the dollar, Tennessee to 45 and Virginia to 43 and the col-
lapse of the greater part of the stock banks was bound to
follow, the Chicago merchants hastened to abrogate their
agreement and to accept Illinois currency at what it would
bring in New York exchange.124
Everywhere the whole issue of stock notes began to be
discredited. Merchants refused to give change in coin for
a bank note and persons depositing Illinois notes at a
bank were required to accept payment in the same from
the bank.125 The business men of Springfield voted to
receive the notes of only thirty-six banks which had depos-
ited northern state bonds with the auditor.128 As a result
of the scarcity of money a considerable amount of specie
was forced out of hiding places and into circulation.127
If the war had begun in the autumn of 1860 instead of
in the spring of 1861, the farmers of the state would have
been caught with an immense amount of rejected and depre-
121Chicago Tribune, April 17, 1861 ; St. Louis Democrat, April 3, 1861 ;
Champaign Gazette, April 10, 1861.
122SV. Louis Democrat, April 3, 1861 ; Missouri Republican, quoted by
Illinois State Journal, April 6, 1861.
123Chicago Tribune, May 2, 1861.
««/«</., May 16, 1861.
12slllinois State Journal, May 16, 1861.
12«Ibid., May 18, 1861.
™Ibid., May 20, 1861.
168 THE DEVELOPMENT OF BANKING IN ILLINOIS [526
ciated currency on their hands ; but as it was, the large city
banks were the heaviest losers. At the next session of the
legislature they demanded that they be reimbursed under
the guise of a war measure, but they were unsuccessful.128
The provision of the original banking act, which per-
mitted the banks to deposit any state securities on which six
per cent interest was regularly paid, had naturally led
banking associations to purchase the less expensive south-
ern securities. It was this fact that caused the almost
complete collapse of the whole system of banking in Illi-
nois. The securities of all the states except a few in the
North and East had shrunk almost fifty per cent in value
within six months and desperate efforts were made by con-
servative business men to eliminate all currency based upon
depreciated bonds.129 To this end a conference of down
state bankers was held, June 4, 1861, at which representa-
tives from Springfield, Jacksonville, Decatur, Alton, Dan-
ville, and Carbondale were present. The conference made
up a list of fourteen banks, all of whose notes were pro-
tected by the bonds of northern states, and agreed to accept
at par the notes of any bank on the list and to reject the
paper of all other stock banks. This action reduced the
amount of paper in good standing to fl,076,737, whereas
six months before over twelve millions was in circula-
tion.130 Much of the depreciated paper continued to be
used, however, at what were known as merchants', bankers',
and railroad rates. Lists of notes and their rating were
published in the newspapers and posted in stores and
railway stations for the guidance of note holders.131 The
reduction in the amount of media of exchange caused no
appreciable change in prices for the volume of business
had diminished to such an extent that it could easily be
transacted with the remaining notes of Illinois banks and
those of Indiana and Ohio banks.132
12SJournal of Constitutional Convention, 1862, February 6, 1862.
129Chicago Tribune, May 23, 1861.
^Illinois State Journal, June 5, 1861.
131 See Chicago, Springfield and other local newspapers for lists.
1S2Chicago Tribune, May 30, 1861.
527] THE FREE BANK SYSTEM 169
In order to assist note holders in disposing of their
notes, firms like Tinkham and Company and the Ridgely
Bank in Springfield established agencies for the conver-
sion of rejected notes into bonds and then into New York
exchange. For a few weeks these firms along with scores
of individual note holders, poured the notes into the office
of the state auditor at the rate of $100,000 a day ; in fact,
that official was compelled to close his office for a time
until the accumulation of notes could be counted, can-
celled and burned.133
In the meantime, the bank commissioners were trying
to secure additional bond deposits from a large part of the
banks, but were meeting with no success. On May 24,
twenty-three of these were added to the delinquent list. The
remaining seventeen were left undisturbed because their
notes were backed by bonds of northern states and those of
the United States, the latter, however, being worth but
eighty-five cents on the dollar. The banks were compelled
to agree to establish central redemption agencies in return
for their being exempted from call, the advantage to. them
of such exemption being that in case their notes depreci-
ated greatly they could buy them up at a great discount and
present them to the auditor for redemption in bonds, dollar
for dollar. On the other hand, if their notes were under
protest the note holder had a prior lien not only on all the
bank's assets but also upon the stockholders up to an
amount equal to their respective holdings.134
The rapid disappearance of Illinois notes from the
channels of trade placed business upon a specie basis and
the few banks which remained paid out no more local cur-
rency at their counters. The notes of the small group of
banks in good standing were accepted at fche rate of ninety
cents on the dollar, while all the rest were refused. Chicago
had been rated as a "dear market" so long as business was
transacted on a paper basis, but now the wholesale houses
of this city were enabled to compete on equal terms with
those of other cities.135
^Commissioners' report in Illinois State Journal, June 20, 1861.
18tlbid.
1S6Bankers Magazine, xv, 947.
170 THE DEVELOPMENT OF BANKING IN ILLINOIS [528
A comparison of the auditor's report for October, 1861,
with those of July and April of the same year shows the
rapid progress made by that officer in retiring and destroy-
ing the stock bank notes sent in for redemption. On April
1, |11,107,600 was outstanding. By July 1, this amount
had been reduced to $7,294,855 and by October 1, to
$3,507,686.* 36 As the notes were presented to him, the
auditor calculated the ratio which they bore to the total out-
standing issue of the bank in question, and paid to the note
holder the same proportion of that bank's securities. For
instance, during the month of October, 1861, there were
presented notes with a par value of f 279,089, but the hold-
ers received bonds worth only $160,419.80, these amounts
having the same relation to the total amount of the bank's
notes and bonds respectively.
It is impossible to estimate the total loss incurred by
bank creditors through the collapse of the stock banks
in 1861 for the reason that many persons sold their bonds
or notes to brokers at a great sacrifice, while others were
in a position to hold their bonds until the credit of states
like Missouri, for example, recovered from the effects of
reckless finance and the depression which accompanied the
war. If the rate at which the note holders were reimbursed
by the auditor could be taken as a criterion, the loss could
be placed at about forty-four per cent but, as has been
shown, large numbers of persons submitted to a second
heavy discount at the hands of brokers,137 the amount of
which it is not possible to estimate.
By the middle of November but $1,766,000 worth of
securities remained in the auditor's hands, $1,221,000 of
which were the bonds of Illinois. Two of the seventeen
solvent banks had been called upon for additional securi-
ties, leaving but fifteen in unquestionable standing. The
latter group had an outstanding circulation of but $504,346,
secured by $600,000 worth of bonds, $511,317 of them
l3aAuditor's report, in Illinois State Journal, July 2, October 10, 1861.
^"Illinois State Journal, November 6, 1861 ; Message of Governor
Yates, Senate Journal, 1863, p. 24, or Reports of Session, 1863, p. no.
529] THE FREE BANK SYSTEM 171
being various Illinois securities. On January 1, 1862, the
auditor reported that the notes of but three of the fifteen
banks were received at par, the rest being subjected to a
discount of thirty to forty cents, although their securities
were quite as ample and of as good standing. The reason
for the discrimination lay in the fact that the three banks
in question had lived up to their agreement and had estab-
lished agencies in Chicago where their paper could be
redeemed in specie at a cost of but three-fourths of one
per cent. Thirty-six of the stock banks had been in the
hands of receivers for some time. The auditor, on behalf
of the note holders, was entitled to a prior lien upon the
proceeds obtained from the sale of the assets of these banks,
but in January, 1862, he reported that he had not yet re-
ceived a dollar from this source. On that date, the auditor
was still engaged in exchanging bonds for the notes of
fifty-seven banks.138
The legislature in 1859 had provided that a refer-
endum be taken at the general election of 1860 on the ques-
tion of calling a convention to frame a new constitution.
The proposition received the sanction Of the voters and the
convention met in Springfield in January, 1862. The events
of the preceding year had revived the old hostility toward
banks to such a degree that an article was inserted in the
new constitution prohibiting absolutely the incorporation
of any institution with banking powers. Although the
convention was not able to deprive the few remaining
banks of their right to exist, it provided that they should at
once restrict their issues to notes of not less than ten dol-
lars in denomination. In 1864 the minimum was to be
raised to twenty dollars, and in 1866 note issue was to
cease entirely.
In their "address to the people" the members of the
convention assigned the following reasons for their action :
(1) The advocates of stock banking had led the public to
believe that local bank paper was needed in addition to the
^^Proceedings of Constitutional Convention, 1862, pp. 65, 85 ; Report
of Auditor, in Bankers Magazine, xvi, 650; Chicago Board of Trade Re-
ports, 1861, p. 63.
172 THE DEVELOPMENT OF BANKING IN ILLINOIS [530
existing supply of metallic money in the state, but the
paper had merely driven out a like amount of specie.
(2) The system had broken down completely and might
as well be abolished. (3) Gold and silver, together with
the new United States notes, would furnish a plentiful and
dependable method of exchange. (4) Patriotic devotion to
the cause of the Union demanded that all local bank paper
be retired so as to give .the United States a clear field for
the circulation of its notes.139 The article dealing with
banks was sumbitted to the people separately and was re-
ceived with less disfavor than was the main body of the
constitution, the banking article being rejected by 3,801
votes and the whole constitution by over 16,000 votes.
In his report of July 1, 1862, the auditor stated that
there were then seventeen banks in operation with a circu-
lation of $511,286 secured by Illinois and United States
bonds to the amount of $574,532. He was still engaged in
exchanging the securities of defunct banks for their
notes.140 Within the next six months, five new banks were
started under the general law as amended in February,
1861, and the circulation was thereby increased to $566,133,
as compared with $12,320,694, the amount reported by the
auditor to the preceding general assembly.141
The bank commissioners now made a last desperate
effort to rid the state of foreign small notes. They issued
notices to prosecuting attorneys to the effect that the
law must not be regarded as a dead letter, and visited
certain counties in order to secure evidence against vio-
lators. In Christian County, for example, they secured
the indictment of seventeen persons for passing the one,
^^Proceedings of the Constitutional Convention, 1862, p. 1049.
140Classifying the banks by value of securities, we find the notes of
38 banks were redeemed at 50-600
25 banks were redeemed at 6i-7oc
ii banks were redeemed at 71-800
8 banks were redeemed at 81-900
3 banks were redeemed at 90-950
4 banks were redeemed at par
Illinois State Journal, July 7, 1862.
141Reports of Session (Senate), 1863, p. no.
531] THE FREE BANK SYSTEM 173
two and three dollar bills of banks outside of Illinois. They
soon found, however, that such a move was entirely un-
supported by public sentiment and their efforts to enforce
the act came to an end.142
There is little doubt but that the stock banking system
as amended in 1861 would have made a favorable showing
had it had a fair trial. The restriction of securities to those
of Illinois and the United States, the limitation of note
issue and the redemption agency requirement remedied the
fatal defects in the system. However, the large volume of
United States notes, followed shortly after by the notes of
the national banks, prevented a satisfactory demonstration
of the merits of the revised banking system before it went
out of existence. In 1865 the legislature abolished the
office of bank commissioner and entrusted the supervision
of the banks to the auditor and treasurer.143 At that time
there remained twenty-three stock banks with a circulation
of $ 199,364, based upon Illinois six per cent bonds valued
at $252,684.17. August 1, 1866, the ten per cent federal
tax upon state bank notes became effective and resulted in
the retirement of all but $35,046 by November 30 of that
year.144
% In 1867 the legislature authorized the existing stock
banks to retire their notes, reduce their capital stock to five
thousand dollars and continue their banking activities
other than note issue. It was provided that thereafter "no
more banks with power to issue notes . . . shall be organ-
ized."145 The last official trace of the old stock banking
system is found in the report of the auditor for 1869 in
which he informed the legislature that he had in his pos-
session $631 in greenbacks as security for $531 worth of
bank notes still outstanding.148
l*2Illinois State Journal, December 4, 1862; Bankers Magazine, xvii,
241.
l**Laws of Illinois, 1865, p. 20.
14*Ref>orts of Session (Senate), 1867, p. 115.
ltsLaws of Illinois, 1867, p. 49.
14tReports of Session (Senate), 1869, p. 324.
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GENERAL WORKS ON BANKING AND FINANCE.
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Knox, J. J., History of Banking in the United States. New York. 1900.
Noyes, A. D., Thirty Years of American Finance. New York, 1898.
Sumner, W. G., History of Banking in the United States (A History of
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White, Horace, Money and Banking. 4th edition. New York, 1911.
Wildman, M. S., Money Inflation in the United States. New York, 1905.
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Boggess, A. C., The Settlement of Illinois, 1778-1830. Chicago, 1908.
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Davidson, Alexander, and Stuve, Bernard, A Complete History of Illinois
1673-1873. 2d edition. Springfield, 1884.
Edwards, N. W., History of Illinois 1818-1833; and Life and Times of
0 Ninian Edwards. Springfield, 1870.
Ford, Thomas, History of Illinois from its Commencement as a State in
1818 to 1847. Chicago, 1854.
Gerhard, Frederick, Illinois as it is. Chicago, 1857.
Greene, E. B., Government of Illinois. New York, 1904.
Moses, John, Illinois Historical and Statistical. 2 volumes. Chicago,
1889-93-
Pooley, W. V., The Settlement of Illinois, 1830-1850. Madison, 1908.
Reynolds, John, My Own Times, Embracing also the History of my
Life. Reprint. Chicago, 1879.
Thompson, C. M., The Administration of Thomas Ford, Governor of
Illinois, 1842-46. Reprinted from Illinois Historical Collections, vii.
Thompson, C. M., The Monetary System of Nouvelle France. Journal
of the Illinois State Historical Society, Vol. IV, No. 2.
COUNTY HISTORIES.
History of Edwards, Lawrence and Wabash Counties. J. L. McDonough
and Co., Philadelphia, 1883.
Heylin, Jesse, History of Fulton County. Chicago, igoS.1
History of Gallatin, Saline, Hamilton, Franklin and Williamson Coun-
ties. The Goodspeed Publishing Co., Chicago, 1887.
Gale, W. S., and Gale, G. C., History of Knox County. Chicago, I899.1
175
176 THE DEVELOPMENT OF BANKING IN ILLINOIS [534
Baldwin, Elmer, History of LaSalle County. Chicago, 1877.
History of McDcnough County. S. J. Clarke, Chicago, 1878.
Prince, E. M., arrti Burnham, J. H., History of McLean County. 2 vol-
umes. Chicago, igoS.1
Short, W. F., History of Morgan County. Chicago, IQO6.1
Rice, J. M., History of Peoria City and County. 2 volumes. Chicago, 1912.
History of Pike County. S. J. Clarke, Chicago, 1880.
HISTORY OF CHICAGO AND CHICAGO BANKS.
Andreas, A. T., History of Chicago from the Earliest Period to the Present
Time. 3 volumes. Chicago, 1884.
Bross, William, History of Chicago. Chicago, 1876.
Harper, W. H., and Ravell, C. H., Fifty Years of Banking in Chicago.
Chicago, 1907.
Hurlbut, H. H., Chicago Antiquities. Chicago, 1881.
Morris, H. C., History of the First National Bank of Chicago. Chicago,
1902.
PUBLIC DOCUMENTS.
Illinois Session Laws, 1816-67.
Revised Code, 1829.
Journal of the House of Representatives, 1818-65.
Senate Journal, 1818-65.
Reports of Sessions, 1838-69.
Journals of the Constitutional Conventions of 1847, 1862, 1869.
Proceedings of the Constitutional Conventions of 1862, 1869.
Constitutions of 1818, 1848.
Supreme Court Reports, 1819-70.
Report of State Bank Investigating Committee. Springfield, 1837.
Speech of J. A. McLernand : On Bill to Divorce Banks of Illinois from
the State. Springfield, 1843.
Indiana, Constitution, 1816.
United States
Reports of Committees of the House of Representatives
Eighteenth Congress, First Session, Documents, 128, 133.
Twenty-fourth Congress, Second Session, Document, 193.
Reports of the Secretary of the Treasury :
Sixteenth Congress, First Session, House Document, 86.
Eighteenth Congress, First Session, House Document, 140.
Report of the Comptroller of the Currency, 1876.
Reports on the Finances. 4 volumes. 1790-1844.
Letter from the Secretary of the Treasury ... in Relation to the
Condition of the State Banks, January 8, 1838. Twenty-fifth
Congress, Second Session, Document 79.
'Published with Bateman and Selby, Historical Encyclopedia of Illinois.
535] BIBLIOGRAPHY 177
PERIODICALS AND NEWSPAPERS.
The Bankers Magazine. Baltimore-New York, 1847-65.
Chicago Board of Trade, Annual Reports, 1858-65.
Hunt's Merchants' Magazine. New York, 1839-65.
Illinois Annual Register and Business Directory. Chicago, 1847.
Illinois Bankers' Association, Annual Reports of Proceedings, 1901.
Niles* Register. Baltimore-Washington, 1811-48. (Called, Niles' Weekly
Register, volumes i-vi; Niles' National Register, volumes liii-lxxiii.)
The Financial Register of the United States. Philadelphia, July, 1837-
June, 1838.
ILLINOIS NEWSPAPERS.1
The Alton American. November 22, 1833, to June 2, 1834. (Chicago
Historical Society.)
The Alton Courier. Daily, May 29, 1852, to May 31, 1854. Weekly, June
r, 1854, to May 31, 1855. (University of Illinois.)
The Alton Spectator. 1832-37. (Chicago Historical Society.)
The Alton Telegraph. 1836-52. (Called The Alton Telegraph and Demo-
cratic Review, 1843-50.) (Chicago Historical Society, 1836-43; Uni-
versity of Illinois, 1843-52.)
The Central Illinois Gazette. Champaign, March 10, 1858, to February
26, 1862. (University of Illinois.)
The Edwardsville Spectator. 1820-25. (Chicago Historical Society.)
The Illinois Advocate. Edwardsville, February 23, 1831, to August 7,
1832. (Chicago Historical Society.)
The Illinois Gazette. Shawneetown. Odd numbers, 1820-22. (Chicago
Historical Society.)
The Sangamo Journal. Springfield, 1831-65. (Also called, Sangamon
Journal, Illinois State Journal.) (Illinois State Historical Library.)
The Illinois State Register. Springfield, 1839-65. (Illinois State Histor-
ical Library.)
The Independent Democrat: Springfield, March 20, 1843. (University of
Illinois.)
The Illinois Intelligencer. Kaskaskia and Vandalia. Odd numbers,
1820-32. (Chicago Historical Society.)
The Free Press and Illinois Whig. Vandalia. Odd numbers, 1837-43.
(Chicago Historical Society.)
The Illinois Advocate and State Register. January 12, 1833, to June 24,
1835. (Chicago Historical Society.)
CHICAGO NEWSPAPERS.*
The American. 1835-42.
The (Daily) Democratic Press. 1852-58.
The Press and Tribune. 1858-60.
The Tribune. 1860-65.
The Democrat. (Incomplete files.) 1833-61.
JThe location of the files consulted is noted in parentheses.
2Files of all these Chicago newspapers are to be found in the library of the
Chicago Historical Society.
178 THE DEVELOPMENT OF BANKING IN ILLINOIS [536
MEMOIRS, TRAVELS, LETTERS, BIOGRAPHIES.
The Eddy Manuscripts. Copies in the possession of the Illinois Histor-
ical Survey, University of Illinois.
Greene, E. B., and Alvord, C. W., Governors' Letter Books, 1818-34.
(Illinois Historical Collections, iv.) Springfield, 1909.
Greene, E. B., and Thompson, C. M., Governors' Letter Books, 1840-53.
(Illinois Historical Collections, vii.) Springfield, 1911.
Koerner, G. P., Memoirs of Gustave Koerner. 2 volumes. Cedar Rapids,
1909.
Perkins, J. H., and Peck, J. M., Annals of the West. St. Louis, 1858.
Pittman, Philip, Present State of the European Settlements on the Mis-
sissippi. Hodder's edition. Cleveland, 1906.
Smith, W. H., The St. Clair Papers, Life and Public Services of Arthur
St. Clair . . . with his Correspondence and Other Papers. Cincin-
nati, 1882.
Thwaites, R. G., Michaux's Travels. (Early Western Travels, iii.) Cleve-
land, 1904-07.
Thwaites, R. G., The Jesuit Relations and Allied Documents. Volume
Ixix. Cleveland, 1896-1901.
Washburne, E. B., The Edwards Papers. (Chicago Historical Society,
Collections, iii.) Chicago, 1884.
The Williams-Woodbury Manuscripts, in the possession of Mr. A. G.
Woodbury, Danville, Illinois.
Woods, John, Two Years Residence in the Settlement on the English
Prairie in the Illinois Country, U. S. London, 1822.
INDEX
Auditor's warrants, circulation of, 41.
Bank commissioners, provided for, 137; reports, 142, 144, 153, 154; efforts
to save free bank system, 157, 169; duties under act of 1861, 165.
B'ank of Edwardsville, location, 14; difficulties, 14, 16; government de-
posits, 15; relations with other banks, 16; suspension of operations, 17;
analysis of operations, 20; reasons for brief existence, 21.
Bank of Illinois (Shawneetown)
1818-1823. Location, 9; provisions of charter, 9 et seq.; government
deposits, II ; character of management, 12; relations with other banks,
12, 16; devices for aiding note circulation, 12; suspension of opera-
tions, 13; analysis of operations, 20; reasons for brief existence, 21.
1835-1843. Amendments to charter, 64; constitutionality of charter,
65; government deposits, 76; made part of internal improvement
system, 78; dividends declared, 79; increase of capital, 79; branches,
80 ; investigation, 81 ; suspension of specie payment, 83, 88, 100 ; note
issue, 86; mismanagement under new officers, 101 ; analysis of oper-
ations, no et seq.; suspension of operations, 104, 112; liquidation act,
123; progress of liquidation, 124 et seq.
Bank of Kaskaskia, 19.
"Banking and internal improvement" bond issue, 80, 83.
Bissell, Governor, attitude toward free bank system, 147, 154.
Carlin, Governor, attitude toward banks, 86, 88, 96, 113.
Chicago bankers, plan of, for banking reform, 163.
City and Bank of Cairo, provisions of charter, 19; failure to operate, 20;
charter revived (1834), 64; operations during internal improvement
era, 126 et seq.
Coles, Governor, and the first state bank, 35.
Constitutional limitations upon banking (1818), 22; (1848), 134; (1862),
172.
Democratic party, attitude toward banks, 61, 85, 94, 132, 134, 139.
Duncan, Governor, attitude toward banks, 59, 61, 70, 79, 85, 112.
Duncan, James M., controversy over accounts, 52.
Edwards, Ninian, and Bank of Edwardsville, 15, 17, 18; controversy with
Secretary Crawford, 15, 16, 18; relations with first state bank, 42.
English occupation, monetary system during, 6.
Ford, Governor, relations with banks, 113, 117, 118, 120.
Foreign small notes, 86, 141, 172.
Free bank system, provided for in 1848 constitution, 134; adopted by
legislature, 135, 138; provisions of law, 135 et seq.; defects of law,
139; organization of banks, 140, 142, 145, 147, 148, 153, 155; amend-
ment of 1853, 141; of 1855, 144; of 1857, 148; of 1861, 164; condition
179
180 THE DEVELOPMENT OF BANKING IN ILLINOIS [538
of banks, 140, 142, 145, 147, 148, 153, 157 et seq., 166, 170; effects of
panic of 1854, 144; of 1857-8, 148, 150, 152; analysis of statements, 157
et seq.; effect of secession of South, 166; abolition of, 173.
French, Governor, hostility to banks, 119, 133, 135, 138.
French settlements in Illinois, monetary situation in, 6.
Georgia banks, notes of in Illinois, 146.
Godfrey, Gilman and Company, 61, 90, 93.
Gouge, W. M., comments on Illinois banking system, 153.
Illegal note issue, 129, 131, 140, 142.
Indiana banks, notes of in Illinois, 131.
Internal improvement system, 78.
Michigan banks, circulation of notes in Illinois, 131.
Missouri bonds as security for Illinois bank notes, 148, 151, 153, 154, 155,
167.
Nebraska banks, agencies of in Illinois, 147.
Panic of 1819, 21, 27; of 1837, 83; of 1839, 87; of 1854, 144; of 1857-8, 148,
150, 152.
Private banks, 130, 131.
Reapers' Bank, action of, 156.
Redemption agencies, 163, 164.
Reynolds, Governor, attitude toward banks, 48 et seq.
Smith, George, banking operations, 129, 146.
South, secession of, effect on banks of Illinois, 173.
Specie, scarcity of, 7, 60, 153.
Speculation in lead and pork, 90.
State bank, meaning of term, 22.
State Bank of Illinois, failure of attempt to establish in 1819, 23.
First State Bank (1821-1831), controversy over incorporation, 24 et seq.;
provisions of charter, 27 et seq.; character of officers, 30; loans to
officers, 34; efforts to secure government deposits, 31 ; standing of note
issue, 31, 41, 46, 48; constitutionality of charter, 32, 54; attitude of
borrowers, 32, 47; indulgence toward borrowers, 33, 42, 46, 47, 51, 54;
increase of note issue defeated, 34; investigation into its condition, 35
et seq.; measures for winding up affairs, 37, 46, 47, 51, 52, 53; loss to
state due to operations, 40 et seq., 57 ; attitude of Governor Edwards,
43 et seq., 47 ; attitude of Governor Coles, 35 ; attitude of Governor
Reynolds, 48 et seq.; the Wiggins loan, 50; analysis of statement, 55.
Second State Bank (1835-1843), conditions responsible for establishment,
60; provisions of charter, 61 et seq.; branches, 67, 95, 103; officers, 67;
subscription to stock, 65; struggle for control, 66; business methods,
67 et seq., 90 et seq., 105 et seq.; note issues, 62, 63, 71, 86, 95, 101, 103;
efforts to obtain federal deposits, 72 et seq., 87; made part of internal
improvement system, 78; dividends, 79; increase of capital stock, 79;
investigations by legislature, 81, 89, 93 ; suspension of specie payments,
83, 87, 88, 100; resumption of specie payments, 85, 98; operations in
Alton, 90; connection with speculation, 90 et seq.; mismanagement of
539] INDEX 181
directors, 101, 103; cessation of activities, 104, 109; analysis of state-
ment, 105 et seq.; liquidation act, 115; progress of liquidation, 117,
120 et seq.
Union bank, effort to establish, 165.
Whig party, attitude toward banks, 61, 85, 102, 112, 132, 135.
Whitney, Reuben, relations with the second state bank, 74 et seq.
Wiggins, Samuel, loan, 50, 51, 71 ; relations with the second state bank,
66, 71, 76, 89.
Wisconsin Marine and Fire Insurance Company, note issues, 131.
Yates, Governor, recommendations as to free bank system, 163.
THE UNIVERSITY OF ILLINOIS
THE STATE UNIVERSITY
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subjects issued five or six times a year. Volume I contains ten numbers,
5J5 pages; volume II, 575 pages; volume III, 624 pages.
••i-cersity of Illinois Studies in the Social Sciences is a special group
of studies in this general series. A series of monographs in history,
economics, political science, and sociology, issued quarterly. Three d
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The Journal of English and Germanic Philology, published quar-
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lie Bulletin of the Engineering Experiment Station. A report
of the research work in the Engineering Experiment Station.
4. The Bulletin of the Agricultural Experiment Station.
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9. The general series, including the I catalog, and the
n.rs of the undergraduate colleges, the Graduate School, the Colleges
of Law and Medicine, the Schools of Dentistry, Pharmacy, Education,
the Courses in Business Administration, the Library School and the Sum-
mer Session.
10. The Bulletin of the Illinois Association of Teachers of En
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UNIVERSITY OF ILLINOIS-URBANA
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