The Pennsylvania Legislative-Bank of North America Struggle

The struggle formally began in 1785, but as the reader would well imagine things had been brewing for some time. As a starting point, there was a urban/rural distinction. Unlike the earlier case study the post-war movement was more evident in the hinterland than in the Philly Metro area–in the western counties, which covered a lot of geography. Small towns and agriculture, and a distinctively heavy dose of Scots-Irish superimposed on a longer-standing German?English population. The physical isolation of these areas, while not extreme in the context of the period, was still a factor in the movement’s evolution. The comparative weakness of state administration and local government capacity, the relative lack of newspapers etc., play a role also. What will be evident is that unlike the 1770-76 movement the western movement is not associated directly with the Revolutionary War, as it had ended. It was fueled by the recessionary atmosphere. Homestead farmers and small town merchants (not worker/artisans/Philadelphia merchants) were the principal activists. They are two separate, if somewhat related, populist-like movements. The demographics, the geography and the issues/demands are vastly different than the earlier movement.

With war’s end and subsequent demobilization, pent-up internal migration into the western areas increased noticeably. There was considerable free land available confiscated from Tories during the war, and selling a fire sale prices by Loyalists now leaving the USA after the war. Discharged veterans seeking a restart, carried with them, if at all, nothing more than discounted pension and pay authorization, and very little cash of any type. The general population was probably only marginally better and one can easily sense the migration into the west consisted of hardscrabble households setting up a homestead in an essentially unsettled, isolated area. That is a recipe for a need for credit, simply for the basic necessities, as well as the initial purchase of land for the homestead and equipment and seed. Currency of any kind was scarce, and speculators/lenders stepped up with credit opportunities. Urban areas faced an identical problem, albeit a bit less desperate, with securing capital for business expansion and cash flow operations. As the recessionary atmosphere deepened, the entire of Article’s America felt the burdens of hard times and hard money.

the economic crisis brought most distress to the poorer classes … ‘men … who labored under the intolerable grievance of being obliged to pay for their honest debts. They were farmers whose land had became worthless and the ‘honest mechanic and hard-working laborer in the city, whose ‘insatiable leeches–the landlords–never tired of exacting the last farthing from their distressed tenants’ [88] Janet Wilson, the Bank of North America and Pennsylvania Politics, 1781-7 (the Pennsylvania Magazine of History and Biography, Vol 66, No. 1 (Jan, 1942), p. 6.

If any period called for Keynesian demand-creating deficit spending, this was it–but John Maynard Keynes’s great-grandfather had yet to be born. The economic orthodoxy of the day was held by folk like Robert Morris and his Bank of North America board of directors. Credit, contract law, and “hard” money/currency were cornerstones of then-current fiscal orthodoxy. Given Pennsylvania’s most democratic franchise, within a year or two, sufficient numbers of state assemblymen supporting some action to resolve this situation had accumulated. It was estimated the proponents enjoyed a two-one advantage over those opposed. The closest tool to a Keynesian deficit spending available to the legislature was to increase the money supply by issuing, through targeted legislation, more paper dollars. In January 1785, several bills doing just that were filed in the state legislature.  One quickly passed which authorized the issuance of public bonds (bills of credit) totaling 150,000 pounds, “printed on good strong paper“.

William Hogeland links these bills  to “assembly … populist leaders backed by working people” … the “citizens of Cumberland and Westmoreland Counties in western Pennsylvania … [who] organized to vote in large numbers … put Robert Whitehill and William Findley” [to which I add, John Smilie] in the State House in Philadelphia. Whitehill, Findley and other radical representatives went after Robert Morris’s bank … backed by elite leaders … by landlords and lenders” [99] Hogeland, Founding Finance, p. 141.. These assembly leaders were self-proclaimed farmer spokesmen. Whitehill, born in western Pennsylvania was second generation Scots-Irish. A signer of the Declaration of Independence, delegate to the 1776 state Constitutional Convention., and a long-term state legislative power-broker who did not serve in the U.S. government until appointed to Congress in 1804–where he served for two terms after.

Findley, Irish-Ulster born, a 1763 immigrant was resident in Westmoreland County. He was destined to become an institution of Pennsylvania politics, serving in the U.S. Congress from 1791 to 1817 (with a four year interlude)–although he was arguably among the chief opponents of the 1789 Constitution. An anti-Federalist and then a Jeffersonian Republican, he opposed Hamilton’s National Bank. A strong advocate of what today we call “states-rights”; he was also a firm opponent of slavery. His leadership in the below-described Bank of North America was aggressive, often personalistic, and unyielding. He was a prominent legislator in the two debates cited below.

Smilie, lesser known, also born in Ireland, had immigrated to America in the early 1760’s, settling eventually in Fayette County. He served one term in U.S. Congress (1812) as a Jeffersonian Republican and a vociferous opponent of slavery. He died during that term and is buried in the Congressional Cemetery. The core thrust of their position, as summarized by Joseph Dorfman, was that the BofNA “forced the wretched merchant to resort to grasping usurers to [acquire] loans and has [therefore] thrown the husbandmen and mechanics into bankruptcy. The bank discriminates in favor of speculators as against fair traders, mechanics, and husbandmen [farmers]. The directors [of the bank] give preference in trade by advancing money to themselves and their favorites” [99] Joseph Dorfman, pp. 261-2. As representatives of the “the people”, they were determined not only to terminate the monopoly of Morris’s elite-controlled bank, but to set up in its stead “a new land bank to give ordinary people credit” [99] Hogeland, Founding Finance, p. 141.

The Populist Bank bill masterminded by such as Smilie and Findley created a  state government “loan office” that issued debt to support mortgages for settlers that purchased Pennsylvania-owned land for homesteading. The settler could pay back the loan on installments and in the paper dollars that flowed from the bond issue, which increased the supply of paper dollars in hinterland economies. The operation of this loan office created a revenue stream which the state could pay its own expenditures [88] Dorfman, p. 261..

Included in the bill was an authorization for a petition to form a committee to recommend the termination of the charter of the Bank of North America. The battle had commenced.

At first glance, it appears the legislature struck first and launched an attack on Morris’s bank. But appearances can be deceiving.  With pressures already intense, and passage of the bill seemingly imminent, the Bank had in fact struck first, previous to the bill’s formal approval. A petition was sent to the legislature, signed by a collection of Philadelphia merchants, factors, and shipping houses, only two of which were NOT directors or stockholders of the Bank of North America. The petition asked the Legislature not to approve the bill, to refrain from printing government paper money, support for which, they claimed, was so weak that it could never be a competitive currency. In essence, the merchant petition was taken to mean the Bank of North America would not treat the paper dollars of the legislature on equal terms with their Morris Notes, which would naturally result in paper dollars being discounted, requiring an exchange rate of paper dollars to Morris Notes that would put the former at a considerable disadvantage–penalizing of course those that used paper dollars, i.e. nearly every non-elite. What Morris proposed was for the state rather than to sell bonds to created liquidity for a new supply of paper money, that the state enter into a loan from the bank, in effect making those paper dollars “Morris Notes”.

It was the that petition that resulted in the insertion of the clause in the legislation opening up the process for terminating the Bank of North American state charter. Revocation of the charter meant the dissolution of the Bank, and, unsaid, was an attack on the creditably of its Morris Notes, and outstanding loans which the Bank quite naturally enough would “call” and demand immediate repayment–a bank failure in the middle of a recession being not an especially good thing.

The outcry from all these shenanigans came from Philadelphia merchants threatened with recalled loans they could not repay, but the sheer volume of noise came from farmers and agricultural homesteaders and their small town merchants who would be simply devastated by the chain of events unleashed by the bank’s recall of loans–loans in their case that had been made to provide capital for western land speculators, capital that stood behind the debt held by western farmers and businessmen. To the western populists in particular, the recall of debt, and the required payment of such debt with Morris Notes currency was regarded as illegitimate in and of itself–farmers could not avail themselves of other available credit, and if they could interest rates would skyrocket, exceeding the usury law limits. Repayment was impossible, and since the collateral for the loan was land, foreclosure was sure to follow. The Bank, eventually they believed, would take over their property. On top of that revolting situation, farmers believed they physically lacked the ability to use the Bank of North America, nor could they apply directly for its loans. The Bank was a Bank only for wealthy Philadelphians–and the farmers needed their own Bank, preferably one accepting of government issued paper dollars.

Whitehill told the assembly that strapped farmers and artisans couldn’t get loans at Morris’s bank. Findley supported that accusation with eyewitness accounts; almost a third of the families in his county [he asserted] had been foreclosed. Morris and {James] Wilson countered [that] widespread depression in the countryside was imaginary … Any farmer in the state could [they said] open an account at the bank … as long as he had good connections in the city and could get someone respectable to endorse his notes [99] William Hogeland, Founding Finance, p. 143..

Given that the tit-for-tat crossfire of petitions obscured who was doing what to whom first, and whether the reaction of either party was be best course of action for either, the battle was enjoined–and a considerable element of it included fear, crushed hopes, stereotypes, imagined and real consequences, which closely involved and fragmented multi-classes and ethnic groups. It really came down to who could use or identify with the Bank, and who could not–an elite-mass dichotomy. Fear built on fear and the debate became hyperbolic. The Legislative Committee tasked with review of the dissolution of the Bank charter citing that many of the larger shareholders of the Bank were foreign, foreigners who received the substantial annual dividends of the bank, thereby depleting the capital available for domestic use as a threat to Pennsylvania’s fiscal “safety”. To them the Bank was “an enormous engine of power‘ who had already threatened to blast the credit of the state’s paper currency, dictating to the legislature ‘what laws to pass and what to foreebear’ and predicted that eventually the foreigners ‘interested in the bank would control its policies, and [its] domestic tyranny the good people of america [would be] reduced once more into a state of subordination and dependence upon some one or other of the European powers“. The newspapers predictably followed the populist position and their reports and columns saturated public debate with the sense that banks were “subversive of democracy“[99] Janet Hill, pp. 8-9.

The [bank’s] monopolistic character flows from its charter with its exclusive privileges including limited liability. Its limited liability features enable moneyed men to increase their gains without having either their person or estate upon the same level of responsibility as other citizens … The voting of directors by shares or property rather than by persons allows a few men or their representatives to control the bank during their lives.  By virtue of the corporate charter the many stockholders are dominated by one point of view–that of acquiring wealth … in carrying out their trust [these directors] must obey its sole guiding principle of avarice and relentlessly pursue its soulless pecuniary object without deviation. The special monopolistic tenor of the institution pervades all its operations, and this, like a snowball, perpetually rolled, most continually increase … its influence until it engrosses all the power and wealth of the state. None of its enormous profits go to the government, which bestowed the valuable privileges it enjoys, nor will it allow access to its records by the government’s investigating committee. [99] Debates and Proceedings of the General Assembly of Pennsylvania on the Memorials Praying a Repeal or a Suspension of the Law Annulling the Charter of the Bank, edited by Mathew Carey, Philadelphia, 1786, cited in Dorman, p. 262.

The Bank fought back, of course, and when the Legislature, itself divided over another matter, the continued use of the infamous “Test” of loyalty that in the post-war context discriminated against those accused of Loyalist predispositions and legitimate patriots that out of principle simply refused to take an oath to be loyal to an undefined Revolution”, placed the Bank issue on the legislative back-burner, the respite provided an opportunity for the Bank to regroup and counterattack. Recognizing the desperateness of their position, a majority of bank directors–but a close majority–conceded that the bank would accept paper money on an equal standing, but would be held in separate accounts from Morris Notes–not funged. It also accepted new accounts, with more relaxed terms and conditions that permitted non-elite deposits and therefore eligibility for its loans. In this interim period, Morris reported that “sixty-seven new deposits were opened” and 107, 240 pounds and shillings had been deposited”. The Bank had seemingly reversed its policies–except that it soon was revealed that almost all these paper dollar deposits were made by the directors of the Bank. That didn’t go over well and so the Bank hired a “Founding Father” James Q. Wilson to construct and write a policy defense of the Bank, its benefits to the community, and the costs which would follow if it were closed down. By this time it was summer and the Legislature had adjourned to allow its farmer-delegates to go back home and farm/harvest.

Wilson, however, opened up a new line of attack–on the structure of the state-approved corporate charter. He argued it was fundamentally a contract, and as such the legislature lacked the authority to arbitrarily rescind its validity. That didn’t work either. Essentially, state-chartered corporation was the public-private partnership, which either party could terminate its participation. Accordingly, in September 1785, when the Legislature reconvened, it approved the termination of the Bank of North America’s charter.

The Dark Side Strikes Back

Obviously loss of the state charter hurt the Bank and its operations–but it did not fold up its tent, instead “right-sizing” its activities to preserve liquidity and financial “meaning”. Morris, the Financial Genius, was at his best. They lost much of their “foreign constituency”–which was substantial–and publicly reported in the newspapers the extent and the cost of the legislatures’s arbitrary termination of foreign direct investment. Continuing as a legal corporate body as authorized by the useless, but still valid Articles of Confederation charter, the entity called in its loans, and stabilized its assets and operations. They then applied successfully to the State of Delaware for a state-charter (1786). But operations in Pennsylvania, still the home base, were tenuous. Morris assumed for the first time, formal chairmanship of the board, determined to make one last effort to restore the Pennsylvania state charter

He was greeted a few months later with a public blog from our old friend Thomas Paine, attacking PAPER money, and the legislatures usurpation of judicial powers to deprive the Bank of its state-charter. Apparently he took considerable pride that the Bank of North America was simply his old Bank of Pennsylvania reincarnated and empowered and he rose to the defense of the latter. He was always, a fiscal conservative, a nationalist who was not enamored with state sovereignty, and he was noticeably concerned that the Pennsylvania state government structured in accordance with a state Constitution in which he had played a major part in its writing was turning out to be a widely-viewed dysfunctional and unpredictable, monopoly of public power.  Whatever his motivations, Paine’s support proved a god-send to Morris. It opened up the debate to include the effectiveness of the state itself, and the functionality of its legislature. Along with the Legislature’s absolute unwillingness to back away from the now-much disliked Test of Loyalty, the termination of the Bank’s state charter now was seen by many as one of a long list of dysfunctional decisions out of touch with the realities of Pennsylvania governance.

The bank issue was brought to a boiling point by the debate surrounding a committee report that reiterated the populist concerns and defended the bank’s charter revocation. Four days of debate followed, with packed visitor galleries and media reporting. Morris himself spoke for the better part of a day.  The Populist majority was not helped by legislative debate that revealed that populist assertions justifying revocation of its charter had never been verified and was based on little more than “precipitancy, prejudice and partiality … a reproach both to the government and the people” [99] Wilson, p. 16, Morris made the case that the Bank served larger macro economic interests, as well as proving liquidity for Philadelphia merchants, who would purchase the produce of western agriculture. Moreover, he acknowledged the Bank paid dividends to foreign stockholders, but that the Bank used their investment for domestic lending, and that any dividend paid was seldom returned to the foreign country but instead reinvested in the local economy. In addition, foreign trade and export was the key to future American prosperity.

In essence Morris was making the case that an expanding capitalism offered more to households as well as private business than reliance on a static agricultural base. Moreover, Morris observed the debate was no longer over whether or not to have paper money; the state had created a land office which had (and was) issuing paper dollars, and the Bank had adjusted its policies to accommodate paper dollars (which, as I observed earlier was seriously questionable). Stating the obvious however, proved more effective; citing the incontestable reality that such paper dollars were more volatile, depreciated, and here exchanged as quickly as possible for Bank currency was daily commentary on the deficiencies of paper money. Finally, Morris hit head -on the fundamental populist attack, that a public-private partnership was not a monopoly and did not constitute the unwelcome intrusion of private control over public decision-making. Acknowledging that he and his colleagues were wealthy, certainly stockholders in the bank and benefiting from it, but as far as political control or dominance over policy debate he asked the question “how far does our influence go? ...

We offer our sentiments on various occasions; we urge reasons and arguments which, we at least think, ought to have weight and carry conviction. But if these arguments are offered a certain system of [beliefs and ideology, i.e. populism] there are certain gentlemen from the country [hinterland] who possess a kind of magic, which produce much greater effect than our reasoning. We carry very few points against this magic charm, and with a vote on the question our influence is ended. [99] Wilson, p. 18.

In effect Morris argued both points of views, and systems of thought ought to coexist, and that this checks and balances, a proto-pluralism eventually was resolved in terms of a legislative decision (or logically non-decision). That such legislative decision ultimately rested on the configuration and composition of the elected representatives, however, went unsaid. Nevertheless, Darth Vader had defended himself publicly, and opened himself to questions and attacks. Morris was no longer a mere stereotype, nor a straw man–and he was not without logic, charm or reason.

It was also brought out in the course of the extended debate, that western agriculturalists had indeed created a government “loan office”, i.e. government lending agency that issued paper dollars in the form of farm mortgages and loans and that loan office had issued paper and was making such loans [**] The reader might note that a state government agency issuing mortgages and loans salient to agricultural ED was in existence–a state-level EDO to be sure../ The point was made that agriculturalists had gotten what they wanted and why was it necessary to terminate the the Bank, what further purposes did that solve other than hurt significant elements of the Philadelphia merchant and trade community–and if the debate was any indication, that argument scored points with legislative moderates and independents. If so, a hinterland/urban wedge had made its first appearance.

Populists truck back making points that clearly linked their position to western agricultural fears on the baleful effects of private monopolies, the prejudices of commercial banks against agriculture and hinterlands, and that the integration of private and public interests in a single entity (the state-chartered corporation) was inconsistent with the Pennsylvania Bill of (individual) rights in that “government was not instituted for the emolument of any man, family, or set of men” that the charter was granted in perpetuity when even the state constitution was subject for review every seven years, while the directors of the bank could serve for life [99] Wilson, pp. 20-1. In effect, the populist argued that government and the private sector were two separate spheres, and that the bank public private partnership constituted a de facto use of government to the benefit of private interests–offering little compensation to the general public return.

The bank was opposed to the manners of the commonwealth [i.e. state of Pennsylvania] because ‘our laws and habits countenance long long credits [mortgages] and afford methods for recovering debts’. the Pennsylvania farmer was helpless before the power of a wealthy corporation which belonged in a country  where such institutions as an opulent nobility and ‘royal prerogative’ supported by an enormous civil list and numberless dependents’ had the power necessary to keep it under control. … The Bank … would end by causing a schism in the state. Philadelphia would become like Hamburgh and Dantzick [Hamburg and Danzig in Prussia], and … promote monopolies”. [99] Wilson, p. 21.

The debate, lasting as long as it did became vitriolic, ad hominem (Populists attacked Paine as a “hired hand”), and hyperbolic. Still, the case can be made that a significant public debate had been conducted on this matter–that the two sides had made their positions and motivations clear, and both were available to the public for their reflection. That this debate occurred more than a year after the decision to revoke the bank charter, was also apparent to those that cared to take notice. The legislative policy-making cart had been placed in front of he horse was also apparent to those who thought about such matters. A unicameral legislature under control of a dominant and aggressive majority lacked any checks to ensure balance of constituent interests and policy perspectives. All these viewpoints were available to a wider audience, and were duly noted by member of the emerging Federalist Tribe. Made by one so centrally-placed in that Tribe, Morris’s public legislative defense of key and central propositions core to that emerging Federalist consensus might we suspect have been very impactful.

The legislative committee report favoring the restoration of the Bank charter was brought to a vote on April 1, 1786. It was rejected 41-28–considerably closer a vote than the vote taken the year previously. Annual elections had produced more votes in favor of the Bank, and likely, moderates had re-positioned themselves. Morris immediately was able to get a new resolution entered to suspend the charter repeal and that was rejected by an even closer vote.

The debate and legislative voting made it clear that if Morris and the Bank were to overturn the revocation of the bank charter, it had to be done through victory in elections that Fall. Paine, himself, four days after the vote publicly declared that political change was likely “that the great change in sentiments that is spreading through both the city and country [hinterland], it is visible that the people are recovering from the delusion and bubble of last year”. Those associated with the Bank accordingly injected their position and perspective into campaigns and distributed campaign literature. For the first time the Bank was able to systematically define and explain its existence, the benefits derived thereto, and counter the positions of its adversaries. Newspapers continued their hyperactive attack on the Bank, and the wealthy, with Tom Paine attacked as the tool of the wealthy, rebutted by Paine himself, who accused the populist leadership of themselves being “tools” of the wealthy who lived off agriculture and farming.Paine countered that public-private banks were “the offspring only of free countries”. Populists countered using Roman senators such as Crassus, and medieval families like the de Medici’s were real examples of how the rich could subvert a democracy [88] Wilson, p. 25.

The election was close but sufficiently decisive. Progressive majority was reduced by eleven, with Bank supporters augmented by six. In toto, twenty-four of the the anti-bank representatives were defeated. The city of Philadelphia was solidly pro-Bank, as were its adjacent Bucks and Chester counties, joining retained pro-Bank majorities in Lancaster and York counties. A key populist leader, George Smiley was defeated. For the first time in eleven years, the dominance of Scots-Irish hinterland representatives

A petition from “the divers inhabitants of the city and liberties of Philadelphia” was delivered to the legislature, repeating the pro-Bank position, and urging a new vote on the matter. A new Committee was named to consider the matter and present a report. The new legislature elected Benjamin Franklin as its President of the Supreme Council (Governor), a stockholder and firmly committed to the Bank of North America. Proposing a compromise that placed limits on the size of the the Bank’s assets–among other limitations–Franklin skillfully maneuvered the bill though a debate nearly as drawn out and hyperbolic as the previous year. Immediately, previous to a final vote on the Bank, the Legislature successfully voted to terminate use of “the Test” or oath of loyalty to the state constitution–expanding the non-populist franchise considerably in the next election. On March 17, 1787 the vote successfully restored the Bank’s charter.

The reason for this complete reversal in the state legislature was afforded by none other than a Founding Father,that we will later argue is an early adherent to our community development approach, Dr. Benjamin Rush. Rush acclaimed the 1786 state election, as “an important revolution in favor of the wisdom, virtue, and property of Pennsylvania … Robert Morris is at the head of that Party that will rule our state. This gentleman’s abilities … and integrity place him upon a footing with the first legislators and patriots of ancient and modern times. [As a consequence of the election] It is expected that the charter of the Bank of North America will be restored … [having been} seized by fraud and force [and] ... will be given back to its original and just owners. [99] Joseph Dorfman, p.267. Morris’s victory, and his successful defense of the Bank, and capitalist commercial financial and currency system, in the Articles most radical democratic-populist inclined state, cemented, perhaps anchored is a better word, the consensus within the emerging Federalist Tribe that installation of the capitalist infrastructure in a national framework could be achieved.

Within two months, delegates to the proposed Federal Constitutional Convention met in Philadelphia–the transition to the Early Republic was about to commence.

The Bank of North America’s “federal” charter abruptly terminated with the demise of the Articles of Confederation in 1789. The Pennsylvania charter became the exclusive mainstay of BofNA, and the bank became a Pennsylvania commercial lending institution-one that increasingly drew closer to the state government. As we know, BofNA was the model used by Hamilton to draft his plans for the First U.S. National Bank in 1791-2.

The worm of public opinion seemingly had turned–mostly in the Philadelphia Metro area.