A Short History of Paper Money and Banking

CHAPTER XVI. Of the Tax paid by the People to the Banks.

The thirty-one chartered Banks of Pennsylvania had, in November 1829, according to the statement of Mr. Gallatin, a nominal capital of $12,032,000. One million three hundred and ten thousand dollars of this amount was invested in real estate, and 4,620,000 in stocks of various descriptions, leaving the Banks 6,102,000 to employ in discounting notes.1 From the $5,930,000, invested in stocks and real estate, it is to be presumed they derive as much advantage as private persons derive from similar investments. With the remaining 6,102,000, they discount notes to the amount of 17,526,000. On this amount they draw interest at 6 4–10 per cent., for the usage of the Banks is to charge 64 days’ interest on loans for 63 days.

The revenue which private capitalists would derive from lending $6,102,000 at the legal rate of six per cent., would be $366,120 per annum. The revenue which the Banks derive from the management of this amount, is 1,121,664 dollars.

If the Banks do not, by the use of a nominal capital of $6,102,000, draw interest from the people on the sum of 17,526,000 dollars, their returns to the Legislature are deceptive. If they actually draw interest on this amount, they draw from the people $755,544 per annum more than would be drawn by private persons lending bona fide capital of the same amount as the nominal capital of the Banks.2

Supposing the sums paid in each year, since the passage of the Bank act of 1814, to equal that paid in 1829, the total amount paid by the people in sixteen years, over and above six per cent. on the loanable capital of the Banks, is $12,088,704. A direct tax of half the amount for the support of government, would have produced a rebellion.

The Bank of the United States had, on the 1st of November, 1829, a nominal capital of $34,996,270. Of this amount, $11,717,071 were invested in public stocks, and $3,876,404 in real estate, leaving it $19,402,795 of nominal capital for its proper business of accommodating borrowers and dealers in bills of exchange. On this amount of bona fide capital lent at six per cent., private persons would draw a revenue of $1,164,167. But the Bank, with this amount of nominal capital, discounts notes and bills of exchange, to the amount of 40,017,445 dollars, from which it derives an annual revenue of $2,561,114, or $1,396,947 more per annum than would be received by private capitalists. In this estimate, we do not include what is paid to the Bank on the rate of exchange, though this must amount to hundreds of thousands of dollars.

Of the tax paid by the people for the support of the local Banks in other States than Pennsylvania, it is not so easy to form an estimate. Mr. Gallatin gives a statement of 297 institutions having nominal capitals of the amount of 97,381,935 dollars, but he does not state what portion of their capital is invested in stocks and real estate. The loans made by certain local Banks, out of Pennsylvania, having capitals of the amount of 81,363,224 dollars, he states to be 108,341,268; but he gives no statement of the loans made on 20,412,711 dollars of nominal Bank capital. Supposing the loans on this amount to be in the same proportion, the total amount loaned by the local Banks out of Pennsylvania, is 135,522,331 dollars, and the annual Bank interest on it 8,673,427 dollars.

Supposing these Banks to have the same proportion of their capital invested in stock and real estate, as the Banks of Pennsylvania, they have 49,387,015 dollars left for the business of discounting. From such an amount of bona fide capital lent at six per cent., private persons would draw an interest of $2,963,220. But the amount the Banks draw is, 8,673,427 dollars, or 5,710,207 more than would be drawn by private capitalists.

The sums, then, extracted from the people, over and above six per cent. on so much of the Bank capital as is employed in discounting, or the tax paid by the people for the support of the Banks, would appear to be—

For the support of the Banks of Pennsylvania,		$   755,544
do.	local Banks of other States,	5,710,207
do.	United States Bank,	1,396,947
		$7,862,698

We cannot pretend to be very exact in our estimate. The local Banks in the other States, may have a greater proportion of their capital invested in stocks and real estate, than the Banks of Pennsylvania, or they may have a less proportion. The total amount of their loans may be greater or may be less than has been calculated from the data furnished by Mr. Gallatin. It is enough to know that the extra interest is millions per annum.

The principle on which this tax is levied, cannot be misunderstood. With a loanable capital of 100,000 dollars, a Bank can, by the help of its deposits and circulation, make loans to the amount of 200,000 or 300,000. Hence, for every hundred thousand of their own capital employed in discounting, the Banks draw twice or thrice as much interest as is drawn from the same amount in the hands of private capitalists. The gain of the Banks from their practice of taking the discount in advance, and charging 64 days interest on notes which have but 63 days to run, is also considerable.

 

3 Some corrections might be made in Mr. Gallatin’s estimates, but we take them as we find them, they being accurate enough for the illustration of principles, which is our only object in introducing them. Algebraic signs would, if they were generally understood, serve the purposes of illustration as well as the most correct estimates.

4 It may, perhaps, be argued, that the “surplus funds” of the Banks ought to be added to their loanable capital. But, as Mr. Gallatin has said, “it will easily be perceived, that what is called the surplus, and sometimes the reserved or contingent fund, is nothing more than that which balances the account, or the difference between the debits and credits of the Banks.” The surplus funds of the Banks of Pennsylvania were, in November, 1829, according to Mr. G.’s statement, $1,142,000. If it be thought proper to add this amount to the loanable capital, the estimate of the tax paid by the people of Pennsylvania for the support of their local Banks should be reduced from 755,544 to 687,024 dollars per annum. It is of little moment which mode of estimation is adopted. Either proves that the tax amounts to hundreds of thousands of dollars in each year.

• 1* Letter to Mr. Gallatin, by Publicola, New York, 1815.
• 2* See Say, Book, Chap. xxi, Section 2.
• 3“In most disquisitions upon the noxious tendency of Banks,” says another writer* “much stress has been laid upon the injuries they have a power to inflict, by excessive loans and consequent bankruptcy, and by creating and circulating a permanent excess of currency. Could these two evils be avoided, many believe that Banks would be innoxious. I regret to differ. I am not of those who imagine that Banks incorporated with a liberal capital, will ever endanger their solvency by extending their loans; nor of those who believe that Banks controlled by specie payment, can circulate a permanent excess of paper. And yet, I think I can perceive a portentous power that they exercise over commercial enterprize. I am of opinion that they can circulate a temporary excess of paper, which, from time to time, finds a corrective, in a run upon the Banks for specie; that this temporary excess is succeeded by a temporary deficiency, one extreme invariably tending to another; that the consequences of this alternate excess and deficiency are, in the former case to impart an undue excitement, and in the latter an undue depression to commercial enterprize; that the effect of the former is to create an unnatural facility in procuring money, and to enhance unnaturally the price of commodities; while that of the latter is to produce an artificial scarcity, and to cheapen prices artificially; that the victims of these vibrations are the great body of merchants, whose capital and average deposits cannot always command discounts; that the gainers are a few intelligent and shrewd capitalists, the magnitude of whose deposits commands enormous discounts at all times, and who, being behind the curtain, know when to buy and when to sell. I am of opinion that these vibrations inflict evils which close not with mercantile speculation; that they tend to unhinge and disorder the regular routine of commerce, and introduce at one moment a spirit of wild and daring speculation, and at another, a prostration of confidence, and stagnation of business: that these feelings are transferred from the counting-house to the fire-side; that the visionary profits of one day stimulate extravagance, and the positive losses of another engender spleen, irritation, restlessness, a spirit of gambling and domestic inquietude.
• 4Because they are divisible into extremely minute portions, and capable of re-union without any sensible loss of weight or value; so that the quantity may be easily apportioned to the value of the articles of purchase.*