Safety-fund system. The safety-fund system, so called, was adopted in New York state in 1829.
The banks were required to establish a common fund for the security of the holders of their notes
(and at first for their depositors as well) by a tax of 1-2 of i per cent annually upon the capital stock
of the banks until the fund amounted to 3 per cent of the capital. Any encroachments on the fund
were to be made good by further taxes at the same rate.
From 1829 to 1841 no demands were made on the fund, but a series of bank failures in 1841 and
1842 developed the fact that the law, apparently by oversight, made the safety fund responsible,
not only for circulation, but for all the debts of the insolvent banks. This discovery resulted in the
exhaustion of the fund, although it was more than sufficient in amount to have redeemed the notes
of the failed banks. The law was amended, but the damage to the fund had been done, and in the
period while the deficit was being made good and a new fund accumulated by the annual tax of
1-2 of i per cent there was no security for the payment of notes except the credit of the issuing
banks.