USA > North Carolina > History of North Carolina: The Federal Period 1783-1860, Volume II > Part 10
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With such a system of administration the way was open for misappropriation of public funds. In 1827 a large de-
113
HISTORY OF NORTH CAROLINA
falcation was disclosed. The treasurer from 1787 to 1827 was John Haywood. Few officers of the time had to such an extent as he, the respect and confidence of the people; he was popu- larly known as that "great and good man." There seems to have been no suspicion of his management until 1820, and then an investigation exonerated him. In 1827 he died, and when the committee on the treasury at the succeeding legislature examined the accounts and the money on hand, it was found that $69,377.34 were lacking. Of this amount $28,184.321/2 were charged to the Literary Fund and $22,195.157/8 to the Fund for Internal Improvements-a worthy example of the result of exempting these funds from inspection by the comp- troller. When the defalcation began, was never disclosed. Tradition says that it was due to one of the clerks in the office, but the report of the committee of investigation made more likely a gradual use of the money for private purposes. The popularity of Mr. Haywood among the people was so great, however, that the defalcation was believed by many to have been nothing but a false charge worked up by his enemies. As the treasurer had given no bond for his last year's term, the only method to recover the funds was to settle with his estate. All private claims to his property, except the widow's dower right, were surrendered. Sales were made from which $47,601.371% were realized, leaving a balance due of $21,735.96. Suit was then entered against the estate for this amount; the executors submitted that they could raise only $7,176.60 and judgment was accordingly entered. However only three pay- ments were credited, amounting to $4,341.98. Thus a balance, in principal and interest, of $17,740.40 apparently remained unpaid.
Fortunately the finances were not seriously impaired by the defalcation. The immediate result of the investigation of the treasury was reform. Among the changes made were the biennial instead of annual election of the treasurer; the re- quirement of a bond, approved by the governor and the speakers of the House and Senate, to the amount of $250,000, to be given by the treasurer before entering on the duties of his office; an itemized account of receipts and expenditures to be reported to each session of the legislature and to be pub- Vol. II-8
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HISTORY OF NORTH CAROLINA
lished with the laws; monthly settlements with the comp- troller; the deposit of money on hand in the banks; the in- spection of the Fund for Internal Improvements and the Literary Fund by the comptroller; and the registration and endorsement of the state's bank stock by the secretary of - state.
By far the most difficult financial problem prior to 1836 centered around the redemption of the currency issued during the Revolution and the years immediately after and the rela- tion of the state to banking enterprises.
How perplexing was the situation in regard to the cur- rency is shown by the following statement of the finances for the year 1788.
Money of 1783-'85
Certificate
Cont'al Doll's
State Doll's
Remarks
Receipts
Balance
£ 6,745. 5.3 £ 65,227.14.11
13,231 408,068 Continental bills were
Arrears
.. 54,131.18.8
45,329.10. 8 2 56.12. 204.10. 8
rated with certifi- cates at 800 to 1; state dollars like-
wise ; £1 equivalent
Taxes
£35,862.14.3 £ 28,475.16.10
32,315 169,476 to
$2.50,
face
16. 2. 4 84.14. 4
value.
Total
£96,739.18.2
£139,394.11.11
Expenditures
for arrears ... £60,877.3.11
£ 90.12. 8
160,112 431,919
The certificates, in-
incl'ng sinking
27,555.10.9
80. 1. 1
duced, charged to
£88,432.14.8
215.19. 3 221.16. 9
expenditures represent redemption, for they were punched or burned with excep- tion of £90.12.8.
Balance
.. £ 8.307. 3.6 £ 28,034. 8. 6
The relation of the state to the four kinds of circulating medium in the above table was not uniform. There was no obligation to support the continental and state dollars, for the former had been issued by the Continental Congress and had been in part funded by the paper money issued by the state during the Revolution; while the latter, which composed the revolutionary issues, had been repudiated as a tender in the payment of debts in 1783. But they were still receivable for taxes and their contraction was desirable; hence large quanti- ties were burned each year by order of the finance committee of the legislature. But the obligation to the state currency of 1783 and 1785 and to the certificates was different; the former
110,557. 5. 7
Current exp.
cluding contin'tal and state dollars re-
fund burned ..
£111,360. 3. 5
.
.
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HISTORY OF NORTH CAROLINA
had been issued by the state as its standard money; the latter were promises to pay, bearing interest, and the honor and credit of the state required their redemption.
The confusion in the certificates, their great depreciation, and the interest accruing from them demanded careful and thorough consideration. In 1788 a tax of 3s on each 100 acres of land, 9s on the £100 value of town lots, and 9s on the poll was levied in state or continental dollars, bounty certificates at 800 to 1, specie certificates at their nominal value, or cur- rency certificates at the legal rate of depreciation, as a means of redemption. Thus the state and continental dollars were to be contracted along with the certificates. The next year a more specific measure for "redeeming the certificates and pay- ing the domestic debt" was enacted. This provided for call- ing in all the certificates by January 1, 1791, and replacing the genuine ones with new certificates, to be redeemed by a tax of 1s on the 100 acres, 3s on the £100 value of town lots, and 3s on the poll; and the money in the treasury not re- served for some other purpose was also to be used for re- demption. The report on the reissue, made in 1792, showed that £49,301, 9s. 4d. of new certificates had been put into circu- lation and that there was an outstanding interest debt of £38,372, 16s. 9d. The next law concerning certificates was that of 1794 which made them receivable for land grants at the rate of 50s per 100 acres and required a second filing of certificates, but excepted from the benefits of the law were the Warrenton certificates of 1786 and those issued by Pat- rick Travers, of Cumberland County. In 1799 a third regis- tration of certificates was ordered, to be completed by Decem- ber 1, 1800, and all certificates not registered by that date were forever barred from redemption and were not to be received in any payment made to the state. The amount reg- istered was £16,598.5.11 and the accrued interest was esti- mated at £32,000, increasing at the rate of £1,000 per annum. In 1801 the principal of the certificate debt was estimated at £15,000 and the treasurer was authorized to purchase that amount and to issue new certificates for interest due, but the results were not published. In 1802 another purchase was authorized at the rate of 15s to each £ of certificate; again, the result is unknown.
116
HISTORY OF NORTH CAROLINA
In the meantime the sale of land for certificates went steadily on and seems to have been the principal means of redemption. Just when the process was completed is hard to find for the treasurer never made a special report concerning it; no redemption is mentioned in his annual reports after 1817, though income from land sales continued to be given for several years. The following outline, culled from the treasur- ers' report, shows this process of redemption :
1795 £10,108, 18s, 5d.
1807
£2,515, 0s, 1d.
1796 £37,043, 19s, 3d.
1808
£2,023, 11s, 9d.
1797 £8,171, 0s, 6d.
1809 £1,694, 17s, 9d.
1798
£4,852, 96s, 2d.
1810 £2,606, 18s, 11d.
1799 £7,134, 9s, 6d.
1811
£2,618, 1s, 4d.
1800 £2,918, 19s, 5d.
1812
£2,550, 10s, 10d.
1801
£4,169, 16s, 0d.
1813
1802
£5,987, 1s, 1d.
1814
1803
£4,858, 0s, 7d.
1815
1804
£5,518, 2s, 9d.
1816 $5,477.55
1805
£3,331, 8s, 3d.
1817
$6,352.56.
1806
£3,643, 5s, 10d.
The state currency, as well as the certificates, required re- demption for three reasons ; first, its continuous depreciation, the ratio to specie never being less than two to one; second, no new bills of credit could be emitted to replace the depre- ciated currency after the ratification of the Federal Constitu- tion; and third, the new standard of currency adopted by the Federal Government made the North Carolina pound, shilling and pence currency an anachronism; indeed, in 1809 the cur- rency of the United States was recognized as the lawful cur- rency of the state, and permission was given to keep the records of the state in dollars and cents, but the state cur- rency was too widely circulated to permit immediately car- rying out the latter provision.
The first step toward redemption was the tax of three pence on each £ value of property in the currency act of 1783; in that of 1785, 5s 6d on the 100 acres of land, 1s 6d on the £100 value of town lots and 1s 6d on the poll were levied for the same purpose. . During 1786, 1787, and 1788 £27,304, 19s
117
HISTORY OF NORTH CAROLINA
1d were collected and were burned; worn out currency was also destroyed, making a total of £40,218, 19s 4d retired .. But in 1789 and each subsequent year the sinking tax was sus- pended; doubtless the immediate pretext for this was the tax imposed on certificates, but a larger and more permanent cause was the general antipathy to taxation in the state.
The final method adopted for retiring the currency was the use of dividends from bank stock and the co-operation of bank- ing institutions. The first banks organized in North Carolina were the Bank of the Cape Fear and the Bank of New Bern, which received their charters in 1804. Their combined capital was $450,000, of which the Bank of the Cape Fear had $250,- 000, and the Bank of New Bern $200,000; the amount of notes and debts of the former was not to exceed $750,000 over the monies on deposit, of the latter $600,000; also the right of the state to subscribe 250 shares in each institution was re- served.
The immediate effects of the banks on finance and com- merce were good. Their notes, engraved on silk paper, were exchanged for the ragged state currency. The dividends were promising. So in 1807 the treasurer was ordered to sub- scribe the number of shares reserved for the state. Soon, however, the banks began to return into circulation the state currency which they had received, offering it in the payment of debts instead of specie or their own notes. Thus specie was hoarded and depreciation of the bank notes set in, for they were redeemed only in the depreciated currency. Two remedies were applied. The first was to levy a tax of one per cent on bank stock held by individuals and to limit ex- cessive note issues by ordering the forfeiture of the charters of the banks, if notes in excess of the amount authorized were issued. This was a conservative measure, enacted in 1809. The next year a radical, almost revolutionary measure was taken. That was the charter of a new bank, to be known as the State Bank of North Carolina, which, it was hoped, would absorb the existing banks and equalize the relation between currency and specie. The charter provided for a central bank in Raleigh with branches at Edenton, New Bern, Wilmington, Fayetteville, Tarboro, and Salisbury, with a capitalization not
118
HISTORY OF NORTH CAROLINA
exceeding $1,600,000, of which $250,000 were reserved for the state, to be paid for in gold and silver or stock of the United States. In subscriptions preference was to be given to the banks of New Bern and the Cape Fear, and no new bank was to be chartered until the charter of the State Bank should ex- pire in 1830. As the charters of the existing banks expired in 1820 it was intended that their capital would thus be in- vested in the new institution. Three-fourths of the capital stock was to be paid in specie, one-fourth in paper. The indebtedness by bond, bill, note, contract or otherwise was not to exceed $4,800,000 above the amount on deposit, and all such liabilities, also debts due the bank, were to be redeemed in gold and silver upon judgment in the courts. After the bank went into operation the state currency should not be received as legal tender in payment of debts to the bank, but the state's dividends should be used to redeem the paper cur- rency when presented to the bank. Thus the redemption of the outstanding paper money was provided for along with new banking facilities.
As subscriptions for stock in the new corporation were not as liberal as was expected, the charter was amended in 1811 by extending its duration until 1835, allowing the bank to withhold 4 per cent of the interest on unpaid stock sub- scribed by the state, and by exempting the stock and dividends from taxation, provided that the bank would, for one year, from December 18, 1816, to December 18, 1817, take up and exchange the paper currency of the state for bank notes or specie at the rate of 10s for $1.00; on compliance with this provision, the governor was authorized to issue a proclamation that the paper money was no longer a legal tender except to the bank, and the bank should return the currency to the state as dividends on the state's stock.
Thus the redemption of the state currency was provided for and in 1816 the state's financial transactions began to be reckoned in the currency of the United States instead of the state currency. How much of the state currency was retired by the State Bank in the year 1817 is unknown; the amount redeemed by dividends from 1813 to 1824 inclusive was £93,915.
CHAPTER VII BANKING PROBLEMS, 1804-1835
INFLATION-DEPRESSION-LIQUIDATION
The state currency was disposed of through the co-opera- tion of the banks. But the old evils of inflation and deprecia- tion, which had characterized the long experience with paper money in all its forms, were perpetuated. The chief differ- ence was that instead of paper money, the bank notes were the cause of confusion and commercial depression. Two influ- ences contributed to this condition. First of all, there was a rapid increase of banking capital. In 1804 the total author- ized capital was $450,000 with the right to issue $1,350,000 of notes. In 1810 the authorized capital was increased to $2,050,- 000 and the possible note issues to $6,150,000. However, the operation of the banks was not so extravagant as these pro- visions might suggest, for their notes stood the strain of the second war with Great Britain well. Said a legislative report of 1817: "When the banks to the west and the south of New England suspended specie payment, the notes issued by the State Bank of North Carolina became in a general degree a continental currency. In Georgia they were at par, received and issued by the banks of that state. In South Carolina they were always at par, except occasionally in the city of Charles- ton, where they were subject to a small depreciation. Every- where else they bore a premium, often a considerable one." 1 In 1816 the notes of the North Carolina banks were in demand in the money markets, being quoted at a premium in Phila- delphia, and in 1817 specie payments were resumed by the banks.
1 Report of A. D. Murphey on the Banks (Senate Journal, 1817, np. 89-91).
119
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STATE BANK BUILDING, NOW RECTORY CHRIST CHURCH, RALEIGH
121
HISTORY OF NORTH CAROLINA
Contemporary with this expansion of the currency there developed a desire for speculation. The more bank notes is- sued, the greater was the demand for them. This is well il- lustrated by the re-charter of the banks of New Bern and Cape Fear. In 1814 the directors of those institutions peti- tioned the legislature for an extension of the charters, which would expire in 1820. The petition was granted on condition that the banks would increase their capital to $800,000 each. In favor of the measure it was argued that the existence of only one bank after 1820, viz. : the State Bank of North Caro- lina, would create a monopoly and an aristocracy of money which would be dangerous to the liberty of the people. Com- petition in the banking business was therefore desirable. So the Bank of the Cape Fear was allowed to add 5,250 shares to its capital stock, the bank of New Bern 5,750; of this the state was to subscribe 1,000 shares in each institution, and 180 shares of each subscription should be a bonus, and 410 in each should be paid for in treasury notes, the rest at the convenience of the state with no interest on the deferred pay- ments. The state was to receive dividends on the stock sub- scribed, but only the margin above six per cent on the stock unpaid for. The life of both corporations was extended to 1835.
Thus an element of confusion was injected into the mone- tary condition by the issue of $82,000 in treasury notes, with which bank stock was purchased. But the taste for treasury notes, once aroused, could only be satisfied by another issue. So in 1816, when specie was scarce, $80,000 in denominations of less than $1 were thrown into circulation through the State Bank, to be accepted in payments of obligations to the state and again thrown into circulation by the treasurer, and when received at the State Bank were to be credited to the debt of the state to the bank. In the meantime the banks increased their note issues, the State Bank from $145,000 in 1812 to $1,283,677 in 1818; by 1819 that of the Bank of New Bern was $553,180, that of the Bank of the Cape Fear, $739,- 935.
The desire for banking investments increased with the in- flation of the note issues. In 1817 a legislative committee
-
122
HISTORY OF NORTH CAROLINA
recommended an increase in the capital stock of the State Bank and when the directors disagreed, the unsold stock, amounting to 4,240 shares, was by legislative action placed on the market. There was a feeling that the state should assume the entire amount, but this seemed impossible because the directors declared that preference was to be given to small in- vestors and that no proxies would be permitted at the time of subscription. The legislature thereupon resolved that mem- bers might purchase shares with money advanced by the treasurer and quietly turn them over to the state. Only 18 shares were thus secured; evidently the legislators exhausted their bids in making personal purchases and neglected the commission for the state. At the next session a bill to increase the capital stock of the banks of the Cape Fear and New Bern was introduced but was lost in the Commons.
In 1819 a third influence, the inevitable result of expansion of the currency and speculation, increased the confusion and created an incalculable depression. That was a rapid return of the surplus bank notes upon the banks, and a drain on spe- cie. Brokers began to buy the notes of the banks and to submit them for redemption in specie, thus greatly reducing the coin in the vaults of the banks. The process and its results are well described in a legislative report of 1819 as follows: "Waggon after waggon was loaded with specie until the banks found, or thought they found, that the facility of procuring specie produced an effect opposite to that which is usual with estab- lished credit. The notes were not permitted to circulate, but were collected, and sent in for payment. The specie in the vaults was rapidly sinking and the difficulty of continuing specie payments appeared imminent. The only practicable means were to call on the debtors for payment. To the banks it was not material whether the notes were paid in their notes or specie. The first withdrew their notes from the. reach of the brokers. The last enabled the banks to meet them by whomsoever presented. Unquestionably this was the regu- lar remedy, if it were not forbidden by peculiar reasons. But it was represented that the situation of the state did not leave it in the power of its citizens to pay these debts without the most ruinous sacrifices of property and universal distress.
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HISTORY OF NORTH CAROLINA
This distress the banks were obliged to occasion or hazard the credit of their institution. Thus situated, they adopted the alternative which they believed the less mischievous. ** They refused specie to brokers but paid them off in drafts of the North to the South. The distinction between brokers and others was too minute to be steadily observed; others have, no doubt, been refused subsequently, or have found difficulty in procuring specie for notes presented." 2
The above quotation is notable for two reasons; first, it was made in 1819 at the beginning of the great financial crisis which swept over the South and West and gives a favor- able construction to the suspension of specie payment by the North Carolina banks; secondly, it was an official, legislative report, the spirit of which was a contrast to the radicalism which was manifest in the legislature a few years later.
Unfortunately the suspension of specie payment did not put an end to the pressure on the banks. The brokers had recourse to the courts and secured judgments forcing pay- ment in specie. The banks had either to close their doors or to increase the amount of specie. For the latter purpose sev- eral questionable methods were resorted to. One, practised by the State Bank and the Bank of New Bern, was to refuse accommodation to customers unless payment should be in specie ; as illustration, a loan of $1,000 in notes would be made on condition that the principal and interest should be paid in specie. As the bank notes were discounted at 5 per cent and the rate of interest on the bond was 6 per cent, it was charged that 11 per cent interest was being exacted, which was usury. Another expedient, used by the State Bank and the Bank of the Cape Fear, was to buy their own notes outside the state at a figure higher than the market price as a means of "appreciating the notes and giving them greater currency." The same institutions also purchased stock of the Second Bank of the United States as a means of securing funds equivalent to specie. Moreover, the president of the State Bank in 1822 and 1827 bought cotton with the bank's funds, selling for spe- cie at a profit in 1822 but at a loss in 1827. This was not
2 Senate Journal, 1819, pp. 121-124.
Nº
241
Publi Treasuri,
STATE TREASURY NOTES
125
HISTORY OF NORTH CAROLINA
an irregularity merely; it was a violation of the bank's charter.
By such means the banks endeavored to protect their notes without calling in their loans. The state also offered aid; the legislature in 1820 authorized the purchase of bank stock with the surplus money in the treasury, and in 1821, 153 shares of the State Bank were bought, 53 of the Bank of New Bern, and 108 of the Bank of the Cape Fear. In 1823 further sup- port of the banks was given by the issue of $100,000 of treasury notes, which were to be a legal tender for all finan- cial obligations to the state. These were then thrown into circulation and bank notes and specie received in exchange were to be invested in bank stock. Accordingly 24 shares in the State Bank, 330 in the Bank of New Bern, and 680 in the Bank of the Cape Fear were purchased in 1826. The Literary Board also came to the aid of the banks by purchasing 204 shares of the State Bank, 141 of the Bank of New Bern and 50 of the Bank of the Cape Fear. But all these measures proved ineffective, for in 1825 a powerful influence began to operate which forced a resumption of specie. This was the Second Bank of the United States. In 1825 the branch at Fayetteville began to make payment in its own notes only, but received the notes of the local banks unreservedly, and in 1827 "branch drafts" were offered in exchange for the notes of the North Carolina banks. The result was that the Second Bank secured large amounts of notes of the North Carolina banks, submitted them in demand for specie, and the banks were forced to comply with the demand. The banks, outgen- eralled in the game of finance, were forced to call in their loans, which amounted to $5,500,000, while their notes in circu- lation had shrunk to $1,500,000. In December, 1828, the stock- holders of the State Bank met and a committee recommended a wind-up of its business, but action on the report was post- poned until the following June.
Undoubtedly some practices of the banks were clear viola- tions of the charters; others if adopted to-day, when general banking laws have been worked out, would cause the prose- cution of bank officials. There was ample material for a po- litical attack on the banks based on their relation to the
126
HISTORY OF NORTH CAROLINA
state, and an audience was at hand consisting of the debtors who were being forced by the banks to meet their obligations. When the legislature of 1828-29 met a joint committee made an examination of the affairs of the banks. Its report was two-fold: that of the majority, after reviewing the question- able methods introduced into the banking business during the past few years, recommended that the banks be compelled to meet their obligations in specie. That of the minority magni- fied the indiscretion and violations of banking rules into ex- tortions of the people, in the following manner. First, the payment of part of the subscriptions for bank stock in per- sonal notes instead of in specie was characterized as a fraud. Referring to the additions to the capital stock of the banks of New Bern and Cape Fear the report said: "It is in evidence to the undersigned that the whole of the additional stock was manufactured by the banks themselves, and that, in many instances, favored individuals were permitted to acquire stock by subscribing their names and putting their notes into the bank, without advancing a single dollar for capital. It follows that the whole amount of the interest drawn from the people, on the loans made from this fictitious capital, was a foul and illegal extortion." 3
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