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the government gold certificates to be used, as heretofore, in making large payments. It was thought that this would make a place for the gold banks, and would induce their organization in such cities as New York, Boston, Charleston, and New Orleans.
The gold bank act was also an attempt to force the national system into California and the Pacific States. There seems to have been no demand from California for any such law. But in the East it was claimed that, if a paper
a circulation could be introduced into the Pacific States, the gold used in those States would be released for use in the rest of the country and in foreign trade;' while the paper currency would be more convenient and serviceable for the Pacific States concerned, and would stimulate and hasten their development. It was hoped that the greater convenience of the gold notes would soon overcome the hostility of the California people towards paper money, since the notes were actually redeemable in gold on demand, and the banks were required to keep adequate reserves for their redemption.
In the Eastern cities, arrangements were apparently made for the organization of several gold banks, but only one was actually established outside of California. The Kidder National Gold Bank of Boston was established by the banking house of Kidder, Peabody & Co. in 1870, with a capital of three hundred thousand dollars and a circulation of one hundred twenty thousand dollars in gold notes. The success of the venture was not so flattering as to induce the organization of other gold banks in the East, where the great mass of business was on a greenback basis. Its deposits, loans, and discounts were never high, and its business never, apparently, on a paying basis. The bank continued in business only about two years, going into voluntary liquidation in November, 1872.
1 Some thirty or forty million dollars, according to the estimate of the Comptroller. Finance Report, 1871, p. 67. The San Francisco Bulletin made a similar estimate of the gold coin in California and the other Pacific States.
2 Comptroller, Finance Report, 1870, p. 25; Merchants' Magazine, 63, p. 184; Commercial and Financial Chronicle, xi. p. 230.
No adequate field of circulation was available for the gold notes in the East. They were not redeemable except at the place of issue, hence they could have only a local circulation. The United States gold certificates and gold coin furnished sufficient medium for payments to the government and for foreign trade; and it was, of course, useless to attempt to force the gold notes into general circulation, side by side with the depreciated greenbacks. Aside from circulation the gold banks could doubtless have found a profitable business in the large commercial centers, if they could have taken over all of the gold business which the other banks were carrying; but, if the other banks were not willing to surrender this business, the gold banks could offer no facilities or inducement not offered also by the other banks. Hence, both in respect to circulation and to other business, the gold banks failed to take the place which they were expected to fill in the Atlantic cities.
But in California the conditions were different. There were obstacles here, also, but obstacles of a very different nature. The gold banks would have to make their way in California, not against a depreciated paper currency, but against a rooted prejudice in favor of metallic money! Banking in the State had been almost entirely in the hands of private bankers up to 1870; and, at the time the national gold banks were being introduced, a State system was also achieving its initial success. In 1871 there were only four incorporated State and savings banks in the State, and over seventy private banks. These banks were unfettered by the regulations as to reserve, loans, real estate holdings, etc., which would apply to the national banks; while the national organizations could offer to bankers only the additional safeguards of the national system and the very precarious and doubtful profit on circulation.
The First National Gold Bank of San Francisco was organized in November, 1870, and had issued by September of the next year $375,000 in gold notes. It met with much opposition, the notes being very unpopular at first; and a year and a half passed before its success led to the organization of other gold banks in the State. To introduce banks of issue, and to put out their notes as a substitute for coin, appeared to the people as an innovation of doubtful expediency. They were accustomed to gold coin and to a discount on greenbacks. “It was a new thing to see a paper dollar that did not tell a lie on its face. But here were paper dollars without fiction or falsehood. They not only had the color of gold, but they could be exchanged for gold at pleasure. By November, 1871, the Comptroller could say that the National Gold Bank of San Francisco was holding its own, in spite of the opposition which it had met, and was “gradually winning its way into public confidence.” He was, however, appar
3 ently so dissatisfied with the first trials of the gold bank law that he recommended that “provision be made for the establishment of national banks in California and the other Pacific States upon a legal tender basis, and that the law be so modified as to enable them to cope successfully with other banking institutions at present doing business in those States.'
1 Homan's Bankers' Almanac, 1871, p. 57.
4 Finance Report, 1871, p. 67. He made no further suggestion of just how he thought the law could be modified in order to accomplish these results.
The year 1872 saw the first promise of success for the new system. California mining activity was at this time enjoying a decided revival, which lasted for several years. California agriculture was beginning to find itself also in the first large shipments of grain and fruit. The years 1872 to 1875 marked a period of activity in all lines, of great expansion, of inflation of values, and of rapid development of the resources of the State. It was a favorable time for the establishment of a new banking system and for the introduction of a paper currency. The gold notes were found to be more convenient than gold coin, and they were known to be redeemable in gold on demand. By the spring of 1872 the people were beginning to accept the notes without question, and it was seen that they were to have a free circulation.' By this time the success of the First National Gold Bank was assured, and other gold banks began to organize, many of them by reorganization of existing banks. In May the California Trust Company of San Francisco became the National Gold Bank and Trust Company, with a capital of one million dollars and an immediate circulation of four hundred thousand dollars in gold notes, and announced its intention of taking out the full circulation of one million. By the fall of the year gold notes were popular in California, and it was anticipated that they would soon displace a large volume of gold coin, not only in San Francisco, but also in the interior towns. Gold banks were being organized in Stockton, Sacramento, Oakland, and other towns of the State. The gold notes were valued especially for supplying the far-removed mining settlements, because of their greater convenience and cheapness of transportation."
1 Bankers' Magazine, 27, p. 66.
2 Bankers' Magazine, 27, pp. 140 and 386; San Francisco Evening Bulletin, September 16, 1872. The Trust Company had been in business four years, and had made large profits and paid large dividends.
3 Finance Report, 1875, p. 219; San Francisco Evening Bulletin, cited below.
The year 1875 saw the highest point in the history of the gold banks. In the spring and summer of that year the national system promised to supplant the State and private banks of the State, and to substitute its notes for the gold coin circulation. There were at this time nine gold banks in the State, with an aggregate capital of $4,700,000, a surplus fund of over $630,000, and circulation outstanding of $2,640,000. The gold banks were increasing, their business was growing, their notes circulated freely in the interior without coming home for redemption in too large numbers, and their profits were large. The deposits were between four and six million dollars the first half of the year, and their loans and discounts over seven million. The earnings of the two gold banks in San Francisco for 1874 were 13.7 per cent. of their capital and surplus, and for 1875 17.9 per cent. The earnings of the seven banks in California outside of San Francisco for 1874 were 18.7 per cent., and for 1875, 14.3 per cent. There were other gold banks talked of or in process of organization in Los Angeles and in other places in the State. Everything seemed to indicate fair sailing for the gold banks and for the national system in California.
But the gold banks had never tried their ability to weather a storm. The great demand for currency in the rapidly growing interior settlements had kept the notes in circulation, so that the redemption reserves had been ample. The country banks kept a redemption fund with their agents in San Francisco, making all the notes redeemable at this central point, as well as at the places of issue. The free acceptance of the notes had, in fact, made the banks careless in regard to their reserves. During 1874
1 All data in regard to the business of the banks are from the official reports of the Comptroller of the Currency.
2 San Francisco Evening Bulletin, September 4, 1875.