Future Paper Money of This Country [pp. 1-25]

THE PRINCETON RE VIEW.
were now removed, State banks of issue would be multiplied
indefinitely, and their unsecured circulating notes would deluge
the land. During the period of this kind of currency it was
issued under two systems as to the constitution of the banks
themselves, with still further diversities of administration in
different States, to insure the convertibility of their issues. The
two great systems were banks, each with its own special charter, and free banks, i.e. banks established under a general law
authorizing their formation by all who would comply with its
provisions. The prevailing system was that of special charter.
The free system was an episode in a few States, but it was still
in operation in the State of New York when the war broke out.
It undoubtedly suggested the analogous system of free national
banks having their circulating notes protected by adequate public securities lodged with the fiscal department of the State. It
followed the failure of the safety-fund system in the State of
New York. This required all the banks of the State to contribute a small percentage of their capital annually, to be held by
the State as an insurance fund for the redemption of notes of
broken banks. It proved inadequate to bear the strain put
upon it by the bank failures which multiplied through the
commercial panic extending from I837 to I842. The State of
New York then adopted the system of making every new bank
and every old bank, on the expiration of its charter, at once
free and the insurer of its own bills, by requiring the deposit of
an amount sufficient for the purpose in approved mortgages
and public stocks, national, State, or municipal. This tempted
single men, and coteries of men, all over the State, who held
mortgages, or the kind of public stocks required, to organize
free banks and issue circulating notes nearly equal to the face
of the securities deposited, thus duplicating their interest. The
result was the speedy failure of many, and crippling of most of
them. The security for the bill-holders proved imperfect or
worthless. Mortgages, if good, required a tedious process to
turn them into cash. Often the real estate which secured them
shrunk in value far below the face of the mortgage, and had to
be accepted instead of cash by the mortgagee, or by the State
as trustee for the bill-holder. Many stocks of States since solv ent then were in default for interest. This class of securities
IS