MODERATING THE CYCLE

217

deposits of other banks, came in for its share of criticism after
1857. Earlier writers, referring primarily to the deposits of individuals,
 had favored the payment of interest, citing the benefits
Scotland derived from such inducement to its people to place
their money in the banks.! Mathew Carey had, in 1816, taken
exception to a new arrangement by the banks of Philadelphia
whereby they paid interest upon balances due to each other, contending
 that this would tend to induce each bank to contract
harshly [lest it have to pay interest on adverse balances] at times
when such a policy would be disastrous to the community.?
Massachusetts enacted a law in 1837 forbidding the payment of
interest by commercial banks on either time or demand deposits,
except for money borrowed from the state, from savings banks,
or from other commercial banks. The bank commissioners complained
 from time to time of violation of the statute and contended
 that banks ‘“should not borrow money on time,” while
the payment of interest on demand deposits might tend to lure
depositors to unsound banks.? The Connecticut commissioners
thought that for the banks to borrow money by receiving deposits
 at interest was ‘“ to say the least of it, very questionable,”
as it tended to concentrate surplus capital at the points where the
banks were located.
But now the development of New York as the reservoir for the
country’s surplus reserves presented the problem in a new light.
The eastern banks, after the middle of the century, were paying
as much as five and six per cent for the deposits of western corre-1
 Rae, New Principles, etc. (1834), reprint by Mixter under title, Sociological
Theory of Capital (1905), p. 313; Tucker, Theory of Money and Banks (1839), pp.
219, 220, 256-258; Churchill C. Cambreling, Speech on the Removal of the Deposits,
in House of Representatives, Jan. 14, 1834, pp. 18, 19. The Farmers Bank of Maryland
 is said to have been the first to introduce the practice of allowing interest on
deposits by its action in 1804. (Bryan, History of State Banking in Maryland, p. 16.)
2 M. Carey, Letters to the Directors of the Banks of Philadelphia (1816), Preface,

p. Xix.
} Massachusetts, Report of Bank Commissioners (Dec., 1838), pp. 19, 20.
4 Connecticut, Report of Bank Commissioners (1854), U. S. House of Representatives,
 33d Congress, 2d Session, Document 82, p. 84. A law was subsequently
passed restricting the rate of interest that banks might pay on deposits to four per
cent. It was repealed in 1855, but in 1862 the payment of all interest was prohibited,
only to be permitted again a few years later.