USA > North Carolina > History of North Carolina: The Federal Period 1783-1860, Volume II > Part 11
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Likewise the method by which subscriptions to the stock of the State Bank were paid was censured. Of the capital with which the institution began business, amounting to $1,176,000, only $500,000 was in specie, the rest being bank notes. Also when the remainder of the stock was placed on the market in 1818, sales were negotiated in bank notes. "But the charter," says the committee, "authorized the bank to operate on a real and intrinsic capital, and directed that that capital should be paid into the bank by the stockholders. In the transaction re- ferred to, the bank, by a scribbling process of its own, created capital, and paid off a portion of its debt, by the very act by which it also increased its capital." 4
The evils of buying stock at advanced rates and of spec- ulation in cotton were also condemned by the minority. The
3 Report of the minutes and proceedings of the Joint Committee, p. 7.
Ibid, p. 8.
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HISTORY OF NORTH CAROLINA
damage inflicted on the people was described as follows: "It. appears that the people of North Carolina, having al- ready paid to the banks since they went into operation a profit of $4,000,000 on their stock-stock, too, three-fourths of which was manufactured by the banks themselves in a fictitious and fraudulent manner-that having paid this immense sum, exceeding four times the amount of actual capital stock ever paid into the bank according to law, they still hold the notes of the people for more than $5,000,000, about four times the amount of the whole circulating medium of the State. Thus it is in the power of the banks absolutely to extinguish the currency of the country, and when they have taken every dollar out of circulation, still to have a debt against the people to the amount of about $4,000,000. The communica- tion from the stockholders of the State Bank now before the committee, expresses the opinion that it is for the interest of the stockholders to withdraw their money from the bank, and take it under their own management; and contains a resolution by which they have proclaimed their determination to assem- ble June the next, in order to wind up their affairs; and, con- sequently the affairs of the people of North Carolina. Thus, having for years contrived by illegal and fraudulent practices to draw from the people. all the profits of their labors, and having by these practices placed the people in an impoverished condition, where they can no longer pay them large profits, they are now preparing by one fell swoop to extort from them the actual means of subsistence. " 5
In conclusion the minority report expressed the conviction that the banks had violated their charters and recommended that the attorney-general institute proceedings against them through the writ of quo warranto, or other legal process.
The question of adopting the majority or minority report led to one of the memorable debates in the legislature of North Carolina. Mr. Potter, chairman of the joint committee and leader of the minority, submitted a bill directing the at- torney-general to bring quo warranto proceedings against the banks, the trial to be conducted by the Supreme Court
5 Ibid, p. 10.
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HISTORY OF NORTH CAROLINA
with a jury, and in case of a verdict of guilty, the Court was to take over the affairs of the banks and the governor was to pledge the faith of the state for the redemption of the notes and debts of the institutions. The opposition to the bill was led in the House of Commons by William Gaston and David L. Swain, who threw some light on the conduct of the banks different from that of the minority report. Mr. Swain showed that the expansion of banking capital was due to pressure of the legislature, while Gaston took up a number of specific accusations against the banks. In reply to the charge of accepting illegally notes for subscription to bank stock, he showed that the amended charters of the banks of New Bern and the Cape Fear did not require specie to be paid for the new stock and that subscriptions made to the State Bank in paper (promissory notes) were necessary because at that time the other banks had a monopoly on the specie in the state. Thus expediency, not a desire to defraud, caused this violation of sound banking: but a modern reader of his speech must be surprised at the claim that offering notes redeemable in specie was equivalent to paying in specie. Gaston also maintained that requiring those who applied for loans to pay the principal and interest in specie was not usury, for the intention of the banks was not to get unlawful interest but to preserve specie, and the specie so obtained was soon paid out in redemption of their notes. Practically, how- ever, any one must see that the practice imposed a burden on the debtor equivalent to usury. As to the remedy proposed, a dissolution of the banks, Gaston made the following criti- cism, the most cogent part of his speech :
"Do you wish to produce a forfeiture of the charters? The effect is a dissolution of the corporations-a complete extinction of their existence. And when this takes place, what is the conditon of our country? Upon the dissolution of the corporation-upon its civil death I state the law to be, and I state it with an entire readiness to pledge on the correctness of this statement, my professional reputation, whatever it may be-I state the law to be, that the lands of the corporation revert to those from whom they came-that the personal chattels are taken by the State, for the want of
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HISTORY OF NORTH CAROLINA
an owner-and that all debts due to or from the corporation are completely and forever extinguished. Suppose the Bank Corporations dissolved, then, and what is the condition of our country ? The debtors are indeed released-they may be bene- fitted by the tremendous catastrophe. But what of the value of the million and half of the bank notes in circulation? They are converted into rags. What the value of your 7,027 shares of bank stock? Whence will come your available funds to carry on the operations of government? How are you from an impoverished people to raise the necessary revenue?"' 6
In reply to Gaston Mr. Alexander took the position that the debts due the banks would, on the dissolution of the cor- poration, become the property of the state which would make proper disposition of them, citing the seizure of loyalist prop- erty during the Revolution. Gaston, in rejoinder, showed that loyalist property was not the property of citizens but of aliens, while banking property was the property of citizens and by a decision of the courts the property of citizens "is placed out of the power of the collective body of the people and no act of the General Assembly could impair property rights, nor could the legislature provide a new penalty for the punishment of past deeds, for that would be a violation of the charters, retrospective law making, a revolutionary principle in North Carolina and a violation of the federal constitution."
The argument of Gaston was by far the ablest of all the defenders of the banks. Indeed the opposition to the program of the radicals was so strong that Mr. Potter modified his bill so as to make the State Bank alone the object of prose- cution and to have the state guarantee its debts. After some discussion of the amended bill the vote was taken. The result was a tie which was broken in favor of the opposition by the ballot of Mr. Settle, the Speaker of the House of Commons.
The charters of the banks were thus saved from judicial procedure, but the conflict between radical and conservative finance took a new form the next year. The banks of New Bern and the Cape Fear petitioned for an extension of their charters so as to give their debtors easier terms in settling
6 Debates on the bill directing a prosecution of the several banks. Vol. II-9
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HISTORY OF NORTH CAROLINA
their accounts, the bill being introduced by Mr. Gaston. The radicals opposed the measure; they declared that the banks had known for years when their charters would expire, that they should have taken measures earlier to wind up their business, and that an extension of the charters would not help the people but merely accommodate the banks and in the light of their misdemeanors such a favor should not be granted. Again the most convincing argument was made by Gaston. He showed that the sentiment of the stock holders was to make over the banking property to trustees imme- diately and wind up the business ; that the proposed extension of the charters was suggested by a legislative committee which had been appointed at the last session to examine into the affairs of the banks; and that the measure would be in the interest of the people. Mainly to Mr. Gaston's argument was due the success of the movement for extension. As finally shaped, the law provided for an extension of the charters of all the banks until 1838; prohibited new loans by the State Bank after September 1, 1830, by the others after December 31, 1834; forbade any accommodation loans after September 1, 1830; limited the installments on the existing debts to not more than one twentieth each ninety days and also prohibited the issue of bills under $5 after December 1, 1832, or any denomination after December 31, 1834, and required the rc- demption of one third of the existing debts by December, 1834; allowed the bank stock to be received in payment of debts; and dividends of capital stock might be issued after January 1, 1833. The State Bank was also allowed to reduce the number of its directors and the tax on the stock of the other banks was to be abolished after 1834.
The second financial issue of 1829-30 was the establish- ment of a new bank. This problem was an imperative onc on account of the approaching dissolution of the existing banks. In the discussion there was a long and bitter conflict between the influences of sound and radical finance. The matter was opened by a bill for a Bank of the State presented by Mr. Martin, of Rockingham County. The capital of the proposed institution was to consist of all property and stock of the state not otherwise appropriated, including lands,
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HISTORY OF NORTH CAROLINA
bank stock, funds and notes due to the state, etc .; its officers were to be elected annually by the legislature, its loans were to be made on real estate or discount notes with two indorse- ments, and the funds available for loans were to be appro- priated among the counties in proportion to the amount of taxes paid, with a trustee in each county to negotiate the loans and to represent the bank; and cash with which the
WILLIAM GASTON
bank would begin operations should be procured by the issue of state bonds to the amount of $300,000, which should be sold for specie, and the state should be reimbursed by the profits of the bank.
In support of this bill the experience of other states was cited, notably that of Alabama and Georgia. It was also argued that the bank would receive on deposits funds realized from the state's stock in other banks and that the production of gold in North Carolina would enable the directors to secure a large amount of the precious metal which would be con-
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HISTORY OF NORTH CAROLINA
verted into specie. In the Senate, although the evils in the plan were ably exposed by Mr. Meares, the bill was carried by a vote of 33 to 25. In the Commons there was a vigorous and successful opposition, Swain and Gaston again making the most effective arguments. Swain advanced the objection that the notes of a bank founded on assets of the state would violate the clause of the Federal Constitution which forbade the states to issue bills of credit, while Gaston emphasized the inherent danger of the state undertaking the banking business. Most remarkable, however, was Gaston's arraignment of the men who fostered the plan for such a bank as that under dis- cussion. He said :-
"I trust that I shall give no offense, and most certainly in- tend none, when I state that there are few in this body who possess the accurate information on this subject which is nec- essary to protect them from error and imposition. The busi- ness of banking in a State so little commercial as ours, cannot be expected to be well understood in its principles, much less in its details. Several gentlemen, indeed, avow themselves to be unacquainted with the subject and they are of course obliged to rely on the judgment and fidelity of those who can advance higher pretensions. If, unfortunately, those should prove blind or treacherous guides, how can their fol- lowers hope to escape from injury?
"But there is far more danger to be apprehended than want of knowledge. Honest ignorance is often associated with prudence, which like those wonderful instincts bestowed by a bountiful Creator on inferior beings, performs its salu- tary purpose with a certainty beyond the reach of enlightened reason. * Our perils arise chiefly from other quar- ters. They arise from the time, from selfishness, and above all from the love of popularity. Among the consequences which have resulted from excessive banking in this state, few are more prominent than the breaking down of those who have freely availed themselves of the accommodations it offered. Some of these individuals are deserving of our best sympathies. * * * But such are not all. Unquestionably there are many who, bankrupt in reputation as in fortune, turn to patriotism as a trade and strive to win place and make
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HISTORY OF NORTH CAROLINA
money by pandering to the prejudices of the ignorant, the hopes of the necessitous, and the wishes of the vicious. Is it strange that these should project schemes by which new mon- ey-factories are to be erected-offices with fine salaries created -and the means of tinkering broken characters and supply- ing squandered estates, made abundant and easy? Is it singu- lar that they should find a ready hearing with the yet larger number of those who, embarrassed but not broken, alarmed but not despairing, seize eagerly upon every suggestion that promises a change of creditor, or a postponement of the de- mand, awaiting some lucky chance till a gold mine or a lottery ticket shall rescue them from threatened ruin? Or is it extra- ordinary that those, who are themselves free from selfish or impure motives, should catch by contagion the sentiments disseminated around them and rashly pledge themselves to plans which they do not understand but which they are assured are to produce incalculable benefits to their neighbors and friends ?
"Perhaps even these are not the principal sources of the unwise views which seem to prevail. There is a fashion in political whimsies as in the fancies of dress, which if adopted without examination, runs its course and then passeth away. Banks of the States have been lately the fashion around us. All of them have not yet broken, and thus made manifest the wretched materials of which they were constructed. And why should we not have banks of the State also? This I am convinced, sir, operates most powerfully to produce the delu- sion which I lament, and which it is my anxious wish to dispel. And as the novelties of dress most strongly attract those who long to catch woman's smile, and please woman's eye, so the novelties of legislation are most readily adopted by the politicians who are eager in the race for popular favor. As no strength of understanding secures the young gallant from the absurdities of the mode, so neither sense nor principle pro- tects from pernicious but fashionable political errors, him who is over solicitous to please the people." 7
. The opposition to the bill was aided by a technicality : the
7 Debates on the bill for establishing a Bank of the State.
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AROLINA
2262120104
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text of the bill as presented had some gaps regarding the amount of capital of the proposed bank; it was therefore sent back to the Senate as not "perfect" according to the rules of the legislature. The Senate, however, declared the bill perfect; again the House referred the bill to the Senate, when the gaps were filled in, but by that time the matter was adjusted. Gaston, Swain and other leaders of the opposition in the House had secured strength enough to secure indefinite postponement by a vote of sixty-seven to sixty-three.
The movement for a bank on the funds of the state was again defeated in the sessions of 1830-31, 1831-1832, but in 1832 the State Bank declared a stock dividend of 50 per cent and was nearly ready to close its doors. This made some new provision for banking more urgent than ever. Six bills for a new bank were introduced in the session of 1832- 33; that of Mr. Barringer was finally adopted with some amendments. It provided for a Bank of North Carolina with a capital of $2,000,000, one half of which was to be subscribed by the state; the officers were to be elected the first year by the stockholders, thereafter by the legislature. The institution thus outlined was not organized, the reason therefor being that the private stock was not subscribed, capitalists not caring to be a party to an institution whose officers would be elected by the legislature. So at the next session the charter was remodeled. A new name, Bank of the State of North Carolina, was chosen; its charter was to extend to 1860, the capital was fixed at $1,500,000 to be paid in gold or silver or their equivalents, of which the state was to subscribe two fifths; the number of directors was fixed at ten, of whom four should be appointed by the state, and the treasurer of the state should be a member ex officio. The bank was to open its doors when one half of the stock should be paid in, but no dividends should be declared until the entire stock was sold. The note issues were limited to twice the amount of capital.
At the same session the charter of the Bank of the Cape Fear was extended until January 1, 1855, with a capital of 8,000 shares, and its debt limit was fixed at $1,600,000 above the amount on deposit. Private banks at New Bern and Edenton were chartered at the same session.
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HISTORY OF NORTH CAROLINA
The evils and controversies which arose from the early experience in banking suggest certain questions pertaining to the relation of the banks to the state, the currency, and public opinion. First of these is the value of the state's investment in bank stock. The table on the opposite page shows the total income from each bank, the amount of the state's actual in- vestment, and the resulting profit.
Clearly the investments of the state in bank stock yielded a large profit. Also the state's stock contributed to the growth of new economic and social projects through the Fund for Internal Improvements and the Literary Fund. To the former were appropriated the state's dividends from the Banks of New Bern and the Cape Fear in 1821, while in 1825 the additional stock in these banks purchased with the treas- ury notes of 1823 was made a part of the Literary Fund. However, the internal improvement policy of the state was a notorious failure, and no expenditures from the Literary Fund were made for schools until 1839. Also the policies of the banks, already reviewed, were not conducive to prosperity among the people; and when the people suffer, any prosperity on the part of the government is very nominal.
The extent to which the currency was inflated can not be determined; but it is certain that the amount of notes in circulation was not so great as the charters of the banks would permit. Also, in 1825 and thereafter, when the in- fluence of the Second Bank of the United States was felt, there was a gradual contraction of the notes in circulation, the issues of the State Bank declining from $1,598,673 to $655,156, those of the Bank of the Cape Fear from $776,417 to $235,460, and those of the Bank of New Bern from $677,- 597 to $325,444.
An unique feature of the inflation of the currency was the issue between the years 1825 and 1828 of treasury notes by the state. Although the constitutionality of issuing them was questioned, notably by Gaston, no step was taken in the courts to test their validity. They were gradually redeemed
1
No. Share
Cost
Stock Dividend*
Profit of Stock Dividend
Regular and Bonus Dividend
Taxes
Total
Total Profit of State
State Bank.
3,050
$136,206.50 +2,400.00
#$286,788.00 $148,181.50 $465,611.00
$752,399.00 $ 613,792.50§
Bank of Cape Fear
2,122
138,606.50 83,540.00 64,600.00
143,764.00
107,198.00
251,962.00
103,822.00
Bank of Newbern.
1,959
148,140.00 100,810.00 33,000.00
157,111.80
23,301.80
151,944.74
116,762.35
452,717.89
291,907.89
7,131
133,810.00 $420,556.50
$443,899.80 $171,483.30 $761,319.74 $223,960.35 $440,078.89 $1,009,522.39
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HISTORY OF NORTH CAROLINA
* By stock dividends is meant the amount returned to stockholders when the bank closed up business preparatory to dissolution.
# In making settlement with the State Bank, the state contended that a dividend should be declared on 8 shares of stock subscribed, but unpaid for. The bank held that such dividend should be applied to debt of the state. The matter was referred to the Supreme Court, which handed down a decision in favor of
the bank. The Court also held that the dividends of 1831 and 1832 were properly stock dividends and the capital of the bank was impaired when they were declared. (State vs. Bank, 21 N. C. Report. 545.) ' Freeman was appointed to open the matter, and the defendants were ordered to pay the State $17,964.83. § In 1835 the State claimed that taxes should be paid out of the stockholders' dividends, not the general fund of the bank; thus leaving a larger sum for dividends to the State. But the Supreme Court would not support the plea. (State vs. Bank of the Cape Fear, 21 N. C. Reports, 216.)
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HISTORY OF NORTH CAROLINA
and the redemption was a strain on the treasury in years when the state was facing a deficit. The following table shows the process of redemption :
TOTAL ISSUE
1814
$ 82,000
1816
80,000
1823
100,000
$262,000
AMOUNT BURNED YEARLY
1819
$943.34
1827
$9,303.76
1821
7,710.00
1828
17,781.89
1822
9,784.52
1829
19,971.85 1-2
1823
6,310.51 1-4
1830
21,601.61
1824
5,696.25
1831
29,811.77
1825
12,170.89 3-4
1832
18,681.38 3-4
1826
15,392.46
1833
10,565.41
1827
15,523.98
1834
5,138.22
Finally, the cleavage between the forces of conservatism and radicalism in adjusting the banking problem was deep and lasting. Illustrative of this is the fact that Swain and Gaston, the leaders of the conservative faction, were later leaders of the anti-Jackson movement in North Carolina and that the issue which caused the greatest defection from Jack- son in the state was his financial policy of 1832. Thus sound financial policies were one of the fundamental bases of the whig party in North Carolina.
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CHAPTER VIII
THE AGITATION FOR CONSTITUTIONAL REFORM AND THE CONVENTION OF 1835
For forty years after the ratification of the Federal Con- stitution late in 1789, the most important issue in North Caro- lina was that of revising the State Constitution of 1776. The demand for reform, frequently voiced and as frequently stifled, gradually became more insistent until by 1830 it over- shadowed all other questions, impeded plans for social and economic improvement, produced the dilemma of reform or revolution, and culminated in the constitutional convention of 1835. The causes of the agitation were various; they may be classified in three groups,-forms of government in- compatible with the growth of democracy, local sectionalism and economic reform, and minor social and political issues. However these causes were not separate and distinct; they were clearly related to each other, the influence of one rein- forcing the agitation of the others until finally the entire state was convulsed over the problem of constitutional revision.
The first cause of discontent, forms of government out of harmony with the advance of the democratic ideal, is made clear by certain provisions of the Constitution of 1776. "All political power is vested in the people and derived from the people," said the opening clause of the Bill of Rights. In contrast certain clauses in the Constitution placed restric- tions on the exercise of political power by the people. The governor was required to possess in freehold lands above the value of £1,000, members of the Senate 300 acres or more, and members of the House of Commons 100 acres. The landed class was thus given a monopoly on the legislature and the executive. Regarding suffrage there was a compromise. To vote for state senator a citizen was required to possess fifty
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DAVID L. SWAIN
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HISTORY OF NORTH CAROLINA
acres, but to vote for members of the House of Commons pay- ment of taxes only was necessary. Of these qualifications the 50 acres for senatorial suffrage and the 100 for member- ship in the Commons were survivals of colonial practice; that requiring senators to possess 300 acres was an innovation.
Another requirement of the Constitution which also proved inadequate was the dependence of the executive on the legisla- ture. The governor was elected annually by the General Assembly; he also had no veto power, and any independ- ence of action on his part was checked by a council of state, appointed by the legislature, whose advice was official, and whose records were open to review by the legislature. Thus the office of governor was deprived of prerogatives it had enjoyed in the colonial period. Other executive officers, the treasurer, the comptroller, and the secretary of state, were also elected by the legislature. Nor did the judiciary fare much better. The judges were elected by the legislature, and the justices of the peace were appointed on the nomination of the county members of the legislature. The judges held office during good behavior, but the permanence of their salaries was not guaranteed, and there arose a strong feeling that the independence of the judiciary was not secure.
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