A Treatise on Currency & Banking

BOOK FOURTH.

HAVING, in the foregoing three books, laid before the reader the laws which regulate a metallic, a mixed, and an inconvertible paper currency, respectively, together with such collateral subjects as appeared to me to be necessary to a full understanding of the whole question, I shall, in the present book, invite his attention to a few matters of a miscellaneous character, which do not exclusively belong to either of the foregoing classifications, and the substance of which will be found in the heading of the several chapters.

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CHAPTER I.

EXAMINATION OF THE QUESTION, OF WHAT DOES A CURRENCY CONSIST?

THERE is, perhaps, no subject upon which more various and more erroneous opinions prevail, than that which we now propose to examine. The expansion of the currency, the contraction of the currency, the depreciation of the currency, are every day expressions, and yet very few persons can precisely point out the real elements of which the currency is composed. In many public documents, of late years, in which reference is made to the currency, one would be led to infer, that the coin in possession of the public, and the bank notes in circulation, constituted the whole of the currency; and that, consequently, the currency was depreciated or improved according as these two elements were augmented or diminished. Newspaper writers and editors, too, generally take this ground, and it is really amusing to see the frequent attempts that are made by them, to illuminate the public mind as to the condition of certain banks, by a mere statement of their notes in circulation, without discriminating between post notes and notes payable on demand, and leaving out of view entirely, the amount of deposites and other immediate liabilities of the banks.

The most palpable error, however, that prevails in relation to this subject, is the notion entertained by many, that bonds, bills of exchange, and promissory notes, constitute a part of the currency. If this be true, currency, or, what is the same thing, money, would become plenty in proportion to the multiplication of these evidences of debt; whereas, every man of observation knows, that just in proportion as they are multiplied, currency or money becomes scarce, owing to the demand that arises for the means of paying them when they have reached maturity, or are becoming due. Indeed, so far are these securities from constituting any part of the currency, that they even require a portion of that which is currency always to be kept on hand by the persons who are bound for their payment, in order to meet them at the appointed time. The most that can be said of this class of obligations is, that they are contracts for the payment of currency or money, at a future day, and as far as they are negotiated or assigned by endorsement, in the course of business, they constitute a portion of those various substitutes for currency, by which the country in which they are used is saved from the expense of maintaining a larger metallic or paper machinery for carrying on its trade. Their operation, in fact, may be compared to that of the clearing house of London, whereat, by the daily meeting of the clerks of all the bankers, to make a mutual exchange of the acceptances of the principals of each, instead of a payment in money, which would be necessary if each acceptance were paid at each banker’s counter, a very large amount of currency is economised, to the great benefit of all the parties.

Nor is the opinion less erroneous of those who suppose that public securities and the certificates of bank, canal, and railroad stocks, and such evidences of property, are currency. These are in truth nothing but titles for property of a particular sort, and no more constitute a part of the currency than the deeds for lands and houses which the owners of that species of property possess.

With these preliminary remarks, I will now state in the first place, that the currency of a country in which there is no paper money, consists, and consists only, of gold and silver, and any other commodity which constitutes a legal tender, and which every creditor is obliged by law to accept in discharge of a debt. Thus, in Virginia, in the year 1618, tobacco was made a legal tender at three shillings per pound; and in Massachusetts in 1641, corn was made a legal tender at a fixed price; and in 1643, Wampompeag (an article of traffic with the Indians) was invested with the same power in payment of debts to the amount of forty shillings, the white at eight a penny, the black at four a penny, except for county rales.—Thus, also, in Maryland, so late as 1732, an act was passed making tobacco a legal tender at one penny a pound, and Indian corn at twenty pence a bushel. In all these cases, the articles thus made a legal tender, constituted a part of the currency as much as gold and silver; but as such absurd regulations could not but have led to the immediate production of extraordinary quantities of the articles named, it is presumable that they are to be regarded as the mere follies of a moment.1

In countries at the present day, which carry on their affairs without paper money, gold and silver are the only currency. In some, one metal alone is used, and in others, both metals at certain fixed proportions. In some countries too, the legal coins alone of the nation are current, whilst in others foreign coins circulate upon the same footing as the coins of the country. Copper, too, is the currency of some countries, for even large amounts; but this metal constitutes so small a portion of the currency of most countries, that it is lost sight of, in discussions of this sort, precisely as it is lost sight of, when employed in the alloy of silver coins.

In countries where government paper money exists, but where banks have not been introduced, the elements which compose the currency are necessarily increased in number. They consist of not only gold and silver, but of the promises of the government to deliver at a future fixed, or at an indefinite period, certain quantities of those metals, accompanied by threats of punishment against all who should refuse to accept of the same in payment of debts. Such was the character of the paper money issued by the colonial governments of Pennsylvania and other states, prior to the American revolution, and such was that of the three hundred and sixty millions of dollars of continental money, issued by the American congress in seven years, commencing with 1775 and ending with 1781.2 Such also was the character of the assignats of revolutionary France, and such is that, probably, of the actual paper money of some nations of continental Europe. Large issues, however, soon depreciate the currency, drive out of circulation the metallic portion of it, and leave nothing but promises behind, which are rarely redeemed.

It may here not be out of place to remark, that the British exchequer bills, and the treasury notes of the United States, both of which are payable with interest, have not the character of paper money. They are merely evidences of a temporary debt of the governments which issue them, are sold in market like public stocks, and have no more influence in augmenting the mass of the currency, than the bonds, acceptances, or promissory notes of individuals.

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CHAPTER II.

EXAMINATION OF THE QUESTION, OF WHAT DOES A CURRENCY CONSIST? CONTINUED.

IN countries where there is no government paper money existing, as is the present case in Great Britain, France, and the United States, the currency consists of those gold and silver coins which people are obliged to accept by law in discharge of debts, and of such promises of banks or bankers to deliver certain quantities of those coins on demand whenever called upon, as the public or the great body of creditors are willing to accept in lieu of the coins themselves.3

As to the first element here laid down, there can be no dispute, inasmuch as every body must admit that the gold and silver coins recognised by law, constitute a part of the currency. Still it may be proper to remark, that that portion of the coin which is at any time not in the actual possession of individuals, but lying in the vaults of the banks, and for the payment of which on demand the public is in possession of the promises of the banks, is not to be considered as a part of the currency, if the promises which represent it are estimated as a part. Thus, if a bank has $500,000 in specie in her vaults, and has promises out payable on demand for $1,000,000, in estimating the currency as far as this bank is concerned, the specie would not be added to the amount of the promises, and thus make an aggregate of $1,500,000, currency. In making up an aggregate statement of the two elements of the currency, it is not material whether the specie in the banks be counted, if at the same time the amount of the promises which represent it be reduced in the estimate to an equal extent, or, whether that specie be not counted, and the amount of the promises remains without reduction. The aggregate result is the same, but I nevertheless give a preference, for the sake of simplicity, to the latter mode of stating the case, and would therefore say, that the metallic portion of the currency, we are examining, consists alone of the coins in the hands and pockets of the public.

In treating of the second element of oar currency, the first thing to be established is, that the promise of the bank or banker, which passes current for money, must be a promise payable on demand, and not at any future period. Every body knows the meaning of the term ready money or cash to be, something that is available for the payment of a debt at the very instant it is received. A merchant who has a note to pay for a thousand dollars, on the first day of July, knows that he can not pay it on the day it is due, except with coin, or the promise of a bank or banker to pay coin of which payment may be demanded on that same day. If he is even in possession of a post note of a bank or of a treasury note due on any subsequent day, he can not avail himself of it as cash, any more than he can avail himself of the promissory note of an individual, but must convert it into cash or currency, by getting it discounted. It is quite easy to conceive of a great pressure existing in the money market of a commercial city, whilst the parties pressed for money, are in possession of an abundance of such treasury notes, or of post notes, of the best banks.4

But in order that bank notes shall constitute a part of the currency, they must not only be payable on demand, but they must be universally current at the place where they are offered in payment of debts. Thus, the notes of banks not located in Philadelphia are not, generally speaking, currency in Philadelphia. It happens indeed very often, that some of the banks in all parts of the country, find their account in accommodating their customers by receiving from them as cash the notes of distant banks; and it may even happen, that individuals may frequently find it their interest to receive distant bank notes in exchange for goods, or in payment of debts. But in the great mass of cases, the notes of distant banks are sold in the market for currency just like bills of exchange, thus proving, that not only do they not constitute any portion of the currency, but that they even require a large amount of what is currency, to be held by brokers, for the purpose of buying them, and thus rendering them available to their owners.

Having thus, as I conceive, settled two important points in reference to the promises of banks which constitute a portion of the currency, I come now to examine those promises themselves, and to see wherein they consist.

The promises of banks for the payment of coin on demand, consist of,

First: Bank notes promising to pay to the bearer on demand, a certain sum of money, and which are always negotiable by mere delivery, therein differing from the ordinary promissory notes of individuals, which are drawn to order, and are negotiable by endorsement.

Secondly: Bank credits, or what are more commonly called deposites, being those amounts which stand to the credit of parties on the books of banks, and which are at all times payable on demand in coin, the same as bank notes, or which may, if the parties prefer it, be at any time converted into bank notes.

It is essential, however, as in the case of bank notes in order that these credits shall constitute a part of the currency, that they be payable on demand, for the very plain reason, that a deposite payable at a future day stands upon the same footing precisely, as a post note of a bank payable at a future day, and cannot be available as money before it is due, any more than any other debt. Hence the deposits of our savings banks which are only payable at future periods, after due notice given, constitute no part of the currency. The same is true of those deposites which have been for some years habitually received by some of the New England banks, for fixed periods at a stipulated interest,5 and those which some of the banks in other states, and especially in the southwestern, have found it for their interest since the late money crisis, to accept for definite periods from holders of their notes, who were willing to give time for their claims upon the payment of interest, or from others who were willing to assist them by loans of money. And it may also be remarked, that as far as any portion of the deposits stands to the credit of parties, such as trustees, executors and administrators of estates, guardians of minor children, officers of courts, and others, who have deposited a fund to meet future demands, but without any immediate intention or authority to use it, so far they are to be viewed in the same light as deposits payable at a future day, and not as currency. Thus, if ten thousand dollars be deposited in a bank by the assignee of an estate, to remain until a dividend is declared amongst creditors sixty days hence, the bank could lend that money for sixty days without augmenting the currency, and for this simple reason, that the depositor, had, upon the hypothesis assumed, parted with his right to the same fund for sixty days; and therefore stood upon the same footing as other depositors whose claims were payable, not on demand, but at a future fixed day.

And here I will beg the reader to mark well the distinction between a deposit in a bank of discount, and a deposit in a bank of circulation. The former constitutes no part of the currency, as I have asserted in the first chapter of the second book, for the simple reason that, although the depositor may have the right to draw out his coin on demand, yet this right is inseparably connected with the obligation on the part of somebody else, to pay into the hands of the banker simultaneously an equal amount, in order that the banker’s stock of cash in hand to meet daily or unexpected calls may remain undiminished. In the case of a bank of circulation the matter is widely different. The depositor may be paid the amount of his deposite in bank notes, without its being essential to such payments that any debtor of the bank should be obliged simultaneously to discharge his debt, the operation being merely the substitution of one form of bank credit for another, and it is therefore in reference to such a bank that these remarks are made.

I am aware that in estimating bank deposites as a part of the currency, I am advancing a doctrine upon which a difference of opinion exists amongst intelligent men, and for the full establishment of which some elucidations may be necessary. I first asserted this opinion, in the year 1821, in a report on the renewal of bank charters, made to the senate of Pennsylvania, and I have never seen any reason since to believe that it was erroneous.

Bank deposites, as they are called, originate in the following four ways:—

First. Where a party deposites specie in a bank.

Secondly. Where he deposites bank notes.

Thirdly. Where he deposites a note for collection, and the amount, after it is collected, is placed to his credit.

Fourthly. Where he gets a note discounted, and the net proceeds are passed to his credit.

In either of these cases, the depositor has a right to draw out from the bank either in coin or bank notes, without giving a moment’s notice, the whole amount standing to his credit.6 He stands, therefore, upon precisely the same footing, as regards his power of operating in the money market, or in the purchase of merchandise, as any other person who possesses bank notes, seeing, that if those with whom he deals should prefer bank notes, he can just as readily pay them in that way, by sending to the bank, as by giving them a check. So true is it, that deposites constitute currency as much as bank notes, that in all our commercial cities, no other currency is used in all extensive transactions. In all the cities of the United States, nearly all payments of money, except in very small sums in retail transactions, are made in checks on banks, and it is very clear that if deposites were not as much currency in the money market as bank notes, all dealers and traders would be furnished with the latter, instead of the former. In truth deposites are nothing but specie or bank notes, left in the keeping of the banks for the convenience of the owner.

But again. Let us test the soundness of this view, by a few hypothetical cases. Suppose the banks in New York should all at once unite in augmenting their discounts to the amount of five millions of dollars, by which process their immediate liabilities would be in a moment augmented to that extent in the form of deposites. Would the currency of New York be expanded? Would money be more plenty than before? Would competitors in the market with ready cash in hand be multiplied? If the answer to these questions be in the affirmative, and it is difficult to see how they could be otherwise, would the expansion of the currency amount to five millions of dollars, or only to the sum which should be equal to the amount of the bank notes that might be drawn out by the holders of these deposites, which would in all probability be but a small portion of the whole five millions? No one will, I think, contend that the expansion was not equal to the whole five millions, and it would consequently follow, that to restore the currency to its former position, a contraction of five millions would be necessary, and not merely the absorption of the notes, which might have been in the mean time added to the mass in circulation.

Again, suppose at a period when the currency was in a sound condition, money being neither too abundant nor too scarce, the banks of New York should, from some unfounded apprehensions, all at once reduce their loans to the extent of two millions of dollars, by which means their debtors should be obliged to raise funds in the market from that class of persons who had deposites in the banks, and who would of course draw checks upon them, and thus extinguish the liabilities of the banks existing in the form of deposites, to the extent of two millions. Would the currency of New York be contracted? Would money be scarcer than before? Would competitors in the market with ready cash in hand be diminished? A negative answer could hardly be given to either of these questions, and hence the conclusion would seem to be self-evident, that deposites form a part of the currency.

Indeed, it is through the deposites of banks that the most powerful action is exercised upon the currency, where contractions are resorted to. Debtors who are called upon to pay up large sums, would find it very difficult to procure them, if they were obliged to hunt up bank notes, scattered all over the country; and if a city bank were fearful of being hard pressed, she would have very little concern about her notes, if she could only get clear of the demands of her depositors. Deposites, in fact, in large commercial cities, constitute the largest portion of the currency. In the city of New York, on the 1st of June, 1837, shortly after the stoppage of specie payments, the amount of notes in circulation outstanding for all the city banks, was $5,283,950, whilst the amount of deposites, public and private, was $15,843,171.

By the contraction which subsequently took place, the notes in circulation were reduced, by the 1st of April, 1838, to $2,322,186, and the deposites to $11,492,4S6.

I apprehend that no merchant in New York, who felt the pressure of that process, considered that a reduction of the deposites to the extent of four and a quarter millions of dollars, was no diminution of the currency; and if we take into consideration the large amount of these notes, which must, at all times, be circulating at a distance from the city of New York, we shall also be satisfied, that deposites not only form a part of the currency of that city, but a very large part of it.

An examination of the condition of the banks of Philadelphia, would also show an excess of deposites over circulation. By a statement of the condition of the fifteen banks of the city and liberties, on the 3d of November, 1838, (exclusive of the Bank of the United States), made to the legislature, it appears that the amount of their notes in circulation was $4,522,883, whilst the amount of their deposites was $6,813,503. On the 1st of November, of the same year, the circulation of the Bank of the United States (exclusive of post notes), was $8,499,37S, and the deposites $8,591,235, but of these notes, by far the largest proportion were circulating at a distance from Philadelphia, and, consequently, formed no part of the currency of that city.

Having thus, as I conceive, established the propositions laid down in the early part of this chapter, I will, in the next, endeavor to elucidate a matter of very great practical importance, to which the attention of congress and the state legislatures has never yet been particularly directed, relating to the aggregate amount of the currency at any particular period.

CHAPTER III.

ON THE IMPORTANCE OF HAVING UNIFORM PERIODICAL STATEMENTS OF THE CONDITION OF THE CURRENCY.

WHEN we consider the importance which the present banking system of the United States is capable of exerting over the property and industry, and consequently the prosperity of the country, it would seem to be but reasonable that the public, who must always be the victims of a vicious course of policy, should at least be furnished with some means of acquiring a knowledge of their position, in order that they might be prepared to escape from a threatened catastrophe, or at least to mitigate its force. Such, however, is not the fortunate condition of the people of this country, and they seem to be destined to be for ever deprived of all opportunity of becoming acquainted with those premonitory indications, which usually precede a convulsion in the money concerns of a nation. The truth of this remark will occur to most people, who recollect the fact, that the suspension of specie payments in May, 1837, came upon the country, like a sudden clap of thunder on a clear day, and overwhelmed every body with surprise. I say, every body, for the exceptions were extremely rare, of those who, a month before it occurred, had the slightest apprehension of such an event.

This want of knowledge arises, from the circumstance, that the nine hundred banks and branches now operating in the United States, are the offspring of six and twenty states, three territorial, and one general government, between which there has never been any system of uniform action in relation to the terms of charters of banks, or in reference to uniform periodical returns of their condition as to liabilities and resources. The consequence of this has been, that the returns of the condition of the banks, in no two states perhaps, correspond as to dates, or to particulars, nor do even the different banks of the same state always correspond in the latter. In some there is a studied mystification in the mode of stating the account, designed to render it unintelligible, and which nobody but the president or cashier of the bank could explain; whilst in others there is a total disregard of particularisation, by placing under the general heads of “miscellaneous,” “other liabilities,” “other investments,” “specie funds,” and other such terms, many important elements of a statement, without which the whole document is deprived of its utility. If fair play with the public and honest dealing were the objects of these banks, there would be no need for such subterfuges and concealments. Their accounts would be stated with fairness, and every facility would be afforded to the public to understand the true condition of the currency.

It is from such imperfect, heterogeneous and fraudulent statements as those we have described that the secretary of the treasury is annually called upon in January to furnish to congress a voluminous document, containing abstracts or copies of the same, with such condensed tables, as the arts of finance and divination combined will enable him to make out. The consequence has been, that all those tables have been deficient in the important element of uniformity of dates, without which statistical exactness is impossible

Thus, for instance, in his Report “on the condition of certain banks, &c,” of 8th January, 1838, the statements of some banks are only made up to the month of May, 1837, which could throw very little light upon the condition of the currency in the month of November of the same year, to which period the returns of some other banks extend.

But this want of uniformity of dates is not the only point in which the secretary’s reports are necessarily deficient. There is a want of that specification of debts and resources, which no exertion of the secretary can remedy, by which the immediate liabilities of the banks can be distinguished from their deferred liabilities and their immediate resources from their deferred resources, without a knowledge of which, as we have shown in the preceding chapter, it is not possible to arrive at a true knowledge of the condition of the currency. It is to be hoped that this matter will attract the attention of congress and the state legislatures, and that they may be induced to unite in some common system of action, by which all the banks of the country shall be required to make quarterly statements of their affairs at the same specified dates, and upon a plan uniform and simple, that no one who is acquainted with a common account current can fail to understand them.

But, even if such statements as are here recommended, were to be periodically furnished, it would require some skill in accounts to present their aggregates in such a form, as would show the true extent of the currency. Those who have examined the treasury tables and statements must have perceived that the mere adding together of the deposites and circulation of all the banks would not give the true amount of the paper portion of the currency. A large amount of the bank notes returned by the different banks as in circulation, have been deposited, by those into whose hands they passed, in other banks than those by which they were issued, and consequently, so long as they remain there, they appear on the statements of those banks as deposites. Thus, if a person draw out from the Bank of North America notes of that bank for $1000, the proceeds of a discounted note, the accounts of that bank would show an increase of its notes in circulation to the extent of $1000. If the same notes were then immediately deposited in the Bank of Pennsylvania, they would be reported by that bank as an increase of its deposites to the amount of $1000. In such event, it is evident that the same $1000 would appear twice as swelling the currency to that amount once in the form of notes in circulation, and once in the form of deposites, whereas it is equally evident that the currency could only have been augmented one single $1000. It follows, from this view of the subject, that in making out an aggregate statement of the circulation, there must be deducted from the ‘aggregate amount of the notes in circulation, the total amount of notes reported in the different bank statements as “notes of other banks on hand.”

It may, however, be said, that these banks did not come into possession of these notes by means of deposites as above assumed, but that they were exchanged for notes of their own. Granted, but this makes no difference in the result. The banks which received them, would report an increase of their own circulation to the extent of $1000, and if “the notes of other banks on hand” were not deducted, there would appear, as in the first case, a double augmentation of the currency to the extent of $1000.

But it may be further said, that these banks did not obtain possession of these notes in either of the two modes specified, but that they were paid to them in discharge of debts. Is the nature of the case changed by this fact? Not at all. An issue of bank notes to the amount of $1000, can not possibly augment the currency to the amount of $2000, and if we regard the banking system as one whole, just as if it consisted of a principal bank and branches, we can easily see, that if any of its members were in possession of any notes issued by any other of its members, they would be in possession of itself. It would have been absurd to call the notes of the late Bank of the United States in possession of the New York branch, notes in circulation, and to have included them in the amount of the currency.

So also, in estimating the aggregate amount of the currency, must the amount of specie in possession of all the banks be omitted in the account, seeing that that specie having been derived from deposites, or in exchange for notes, already appears on the return of the banks in one of those two forms.

That the truth of these positions may be made manifest, I will make a practical application of them to a table found in the report of the secretary of the treasury of 4th January, 1837, on the condition of the banks. We are there told, in document A. A., that as near to the month of December, 1836, as could be ascertained, the condition of all the banks in the United States was as follows:

RESOURCES.

Loans and discounts,           -        -        -        -	$457,506,080
Stocks,             -       -        -        -        -        -	11,709,319
Real estate,       -       -        -        -        -        -	14,194,375
Other investments,     -        -        -        -        -	9,975,226
Due by other banks,  -        -        -        -        -	51,876,955
Notes of other banks on hand,     -        -        -	32,115,138
Specie funds,            -        -        -        -        -	4,800,076
Specie,                     -        -        -        -        -	40,019,594
	$622,196,763

LIABILITIES.

Capital,                     -        -        -        -        -	$324,240,292
Circulation,                -        -        -        -        -	140,301.038
Deposites,                 -        -        -        -        -	115,104,440
Due to other banks,             -        -        -        -	50,402,369
Other liabilities,          -        -        -        -        -	25,999,234
	$656,047,373

As the account does not balance, it is probable that some of the resources of the banks have been omitted.

Now from this statement it is proposed to ascertain what was the extent of the currency of the United States at the period mentioned, in addition to the amount of the coin in the pockets and strong boxes of the public, which there appears to be no correct means of ascertaining, and for this purpose, I would state the account as follows.

Circulation,         -           -        -        -        -	$140,301,038
Deposites,           -           -        -        -        -	115,104,440
	255,405,478
Deducting notes of other banks on hand,	32,115,138
Leaves,	$223,290,340

Such would appear to be the actual amount of the currency as furnished by the above table. But inasmuch as no distinction is made, between notes or deposites payable on demand, and post notes, or deposites payable at a future period; the account is deficient in a very important element of exactness. For it can be seen, that if the deferred liabilities should have amounted to thirty or forty millions of dollars, the true amount of the currency would have been diminished precisely to that extent.

In regard to the two amounts expressed, by the terms “due by other banks,” and “due to other banks,” standing on opposite sides of the account, it must be obvious, that they are quantities neutralising each other, for the amount due by all the banks to each other, must be precisely equal to the amount due to all the banks by each other. The difference between these two amounts in the table before us, arises no doubt from the fact, that owing to the distance of the banks from one another, there must always be on the route between them, funds in transitu, which although charged by the remitting bank to the account of the one to which they were remitted, cannot have yet appeared on the books of the other as a credit.

CHAPTER IV.

ON THE IMPOLICY OF ADHERING TO OUR PRESENT MINT PROPORTIONS BETWEEN GOLD AND SILVER.

IT may be assumed as a principle that will hardly be disputed, that the soundness of a mixed currency of coin and paper such as we are likely ever to have in the United States, does not depend upon the fact whether gold or silver be the basis. A currency may be quite as sound where silver is the only or chief metal that circulates, as where gold is the only or chief metal. This is evident from the well known fact, that the currency of France which is of silver, is not more liable to fluctuate than that of Great Britain which is of gold. I might even argue that it was in point of fact less fluctuating, but as all I wish to establish is equality, it is not necessary that I should take that ground.

It would seem that the great object of our act of June, 1834, was to establish a gold currency, under the belief that the tendency of gold to drive paper out of circulation would be stronger than that of silver; and on that account the mint proportions were changed with the professed object of drawing gold into the country in preference to silver, when the course of trade should lead to the importation of the precious metals. There can be no doubt, that had congress possessed the right of prohibiting the circulation throughout the United States of bank notes of a less denomination than ten dollars, a gold currency could have been introduced in the place of five dollar notes; but as it possessed no such power, and as there was not the slightest probability that all the state legislatures would have co-operated in bringing about such a result, the measure was, to say the least of it premature.

But even admitting that all notes of a less denomination than ten or even twenty dollars could have been proscribed, I would ask, whether such a measure would have exempted the currency from all liability to fluctuations? This question can perhaps best be answered by referring to the experience of Great Britain. In that country, no note is issued by the Bank of England, or by any joint-stock or private bank, of a less denomination than five pounds sterling, equal to upwards of twenty-four dollars, and yet England has been subject to many great fluctuations in her currency, one of which, that of 1797, brought all her banks to a stoppage of specie payments; and another of which in 1825, was very near bringing about the same result. It is not then the fact, of a mixed currency having gold or silver for its basis, which determines its stability. Our own experience of forty-five years out of fifty-one since the establishment of the government, during the whole of which time silver was almost the exclusive metal that circulated, is sufficient to settle that question, and no one, it is presumed, will maintain the proposition, that the interests of the great mass of the people are not as well promoted by the right of demanding silver for a bank note, as of demanding gold. Indeed, if we take into consideration the universal knowledge which prevails as to silver coins, the familiarity of every body with dollars and half dollars, the vast number of persons who seldom have five dollars in money on hand at a time, the less liability of being cheated with silver than with gold, and the additional fact that many existing ground rent deeds, bonds, and mortgages, expressly call for payment in silver dollars, it would not be hazarding too much to say, that silver is a more convenient coin for the people of the United States than gold. If then it can be shown, that the possession of a gold currency in preference to a silver one, would be not only productive of no positive benefit to the community, but would be attended with positive mischief to the great interests of the country, all parties ought to unite in abandoning the project.

And this brings me to the point, to which the preceding remarks were designed to be introductory.

Prior to the passage of the gold bill above referred to, the metallic currency of the United States had been virtually, as above stated, a currency of silver since the establishment of the government, gold very rarely appearing, whilst that of Great Britain was of gold. The consequence was, that the currency of each was independent of the other, and the contraction or expansion of each did not necessarily act upon the other. The contraction in England, which preceded the resumption of specie payments, in 1821, after a long suspension of twenty-four years, produced no convulsion on this side of the Atlantic; nor did our contraction, distressing and durable as it was, after the removal of the public deposites from the Bank of the United States, on the 1st of October, 1833, which brought down the prices of stocks from 20 to 50 per cent., and led to the importation of 3,793, 293 dollars in silver from England alone, during the year ending on 30th September, 1834, produce any convulsion whatever in that country.7 Such would have continued to be the case, had the mint regulations remained without alteration; but no sooner was gold, by a change in its relative value to silver, rendered the most profitable of the two metals to import, than we found the currency of England disturbed to a degree that rendered necessary an immediate reduction of her paper issues, although the amount of gold drawn from her between the passage of the law in June, 1834, and the 30th of September, of the same year, was but 1,922,960 dollars. To the importations of gold in the years 1835 and 1836, instead of silver, may be ascribed that further contraction of the British currency, which led to the crisis of the latter year, that was so fatal to American credits and American cotton, by which millions of dollars were lost to the country.

Now as like causes will produce like effects, it behoves us to examine well into this matter, and if we find that we have committed an error, it is our duty to retrace our steps. Thus far very little progress has been made towards introducing gold into actual circulation, notwithstanding that a large amount has been imported,8 still a long perseverance in the law will give us a gold currency, but it will be most dearly purchased. It will so closely ally our fortunes with those of Great Brittian, that no convulsion can take place in the currency of that country, that will not act directly and powerfully upon ours; whilst on the other hand, none can take place on our side, that will not act directly upon hers, and in so doing, break down the prices of cotton and tobacco, and other American products in the markets of Europe to the great injury of our planting interest.

But this is not all. The tendency of the present regulation is to drive silver out of the country, and not gold, in all cases where coin is exported, the result of which will be, if long enough persevered in, to deprive us almost altogether of a silver currency, and in that event, a universal resort will be had in all the states to bank notes of the smallest denominations in preference to gold coins of similar denominations, as a remedy for the evil, a remedy, which, it is hoped, no friend of a sound currency desires to see adopted.

If there be any fallacy in this reasoning, it is not intentionally advanced. The subject is a grave and important one, and merits the attention of all who are desirous to keep our country free from foreign alliances, whether they be pecuniary or political; and should congress be convinced that a false step has been made, let that step be retraced. Let the standard of the gold coin be restored to its former high grade, corresponding with those of Great Britain, Portugal and Brazil, that is, eleven parts of pure gold to one part of alloy, and let there be no coins struck at the mint but ounces, half ounces, and quarter ounces, without any fixed legal proportions to silver, but left to find their way into circulation at their fair market equivalency, as gold coins do in France and other countries of Europe. By having coins of familiar and well known weights the people would form right conceptions of the true nature of money; and as the bullion dealers and brokers in all the cities would quote the price of ounces of gold as they do of sovereigns, they would be at all times current at their market value, and could never be driven from the country by our own legislation, or that of other states.

______

CHAPTER V.

ON THE SUPERIORITY OF THE NEW YORK GENERAL BANKING LAW OVER THE PRESENT BANKING SYSTEM.

HAVING, in a former chapter, promised to give my reasons for believing the principles of the New York banking law to be better calculated, if made general throughout the Union, to give stability to the currency than any other that would be likely to meet a general acceptance, I now proceed to fulfil that promise, and shall first give the reader a synopsis of its principal stipulations.

This law provides that the comptroller of the state shall cause to be printed from uniform plates, to be engraved according to his direction, bank notes of the various denominations authorised by law, which notes are to be countersigned, numbered, and registered in his office, in books provided for the purpose. These notes are to be delivered to every banking association organised under the provisions of this act, which shall transfer to the comptroller any of the public debt of the United States, or of any state, that shall be approved by the comptroller, not less in amount than $100, 000 and made equivalent in value to a New York State five per cent. debt in sums precisely equal to the amount transferred, hereby establishing the important and valuable principle of free trade in banking; and when signed and executed by the respective associations, they become, to all intents and purposes, bank notes, and as such may be loaned and circulated as money.

In cases, however, where the association requiring the notes prefers to give mortgages, bearing six per cent, interest, upon “improved, productive, unincumbered lands within the state of New York, worth, independent of any buildings thereon, at least double the amount for which they shall be so mortgaged,” for one half of the amount of the notes, the comptroller is authorised to accept the same in lieu of stocks, and in both cases the depositing party is to be authorised to receive the accruing interest.

The notes thus created upon an actual deposite of property of equal amount, are to be payable on demand in the lawful money of the United States, and in case of default of such payment, except for legal cause, for the space of ten days after the comptroller shall have demanded payment in consequence of having been apprised of the fact, by the protest of a notary, he shall proceed to sell, at public auction, the stocks and mortgages pledged in his hands, and with the proceeds pay the notes of the defaulting bank. Protested notes are to entitle the holder to damages at the rate of fourteen per cent. per annum until paid.

The associations authorised by this act, are empowdered “to carry on the business of banking by discounting bills, notes, and other evidences of debt, by receiving deposites, by buying and selling gold and silver bullion, foreign coins and bills of exchange in the manner specified in their articles of association, for the purpose authorised by this act; by loaning money on real and personal security; and by exercising such incidental powers as shall be necessary to carry on such business.” The shares of the stock are to be deemed personal property, and are to be transferable, like shares in other banks, carrying with them all the rights and liabilities of prior shareholders, and any association may provide in their articles for an increase of their capital, from time to time, as they may think proper. 9 No shareholder is liable in his individual capacity for any contract, debt or engagement of the association, unless the articles of association shall have declared that the shareholder shall be liable.

From this abstract of the law, it will appear, that the security of noteholders is alone provided for, and that no provision is made for the protection of the depositors, who are left as in other banks, in case of a failure, on the footing of common creditors. This distinction is founded upon the soundest principles of policy. Bank notes invested with the character of money, from the very nature of the use they are designed to perform, must necessarily pass from hand to hand in the transactions of business, with a rapidity and universality, which preclude the possibility of a close inquiry into the responsibility of the drawers; and there is therefore as good a reason why the public should be protected against loss from the circulation of paper money, as why they should be protected against loss from the circulation of metallic money, which is the design of establishing and maintaining a mint at the public expense. 10 The case however is widely different with depositors. The individuals who make deposites in a bank, are at all times in a situation to judge of the responsibility of the parties to whose custody they commit their funds, and there is no more reason why a special law should be enacted to protect them against loss, than that one should be enacted to protect any other class of persons who find their account in trusting others with their property.

But, although this be true as regards depositors, they have this advantage over the depositors under the old system, that the bank must either pay them in coin or in notes which represent actual capital and not credit; and it is this feature in the system which gives it its chief superiority over the other.

In a former part of this work, I drew a distinction between the influence which deposites exercise over the currency when made in a bank of discount, and when made in a bank of circulation. 11 I stated, that in the case of a bank of discount, where the money was loaned to other people, and where the depositor also reserved his right of demanding payment at his pleasure, the currency could not be augmented, owing to the fact, that the banker, in order to pay the deposite, would necessarily be obliged to make some of his debtors simultaneously pay up an equal sum, that he might keep his usual stock of money on hand; so that as fast as he enlarged the circulation by payments from his counter, he contracted it by drawing in an equal amount from other quarters, thus leaving the money out of doors precisely the same in amount as before. I stated, on the other hand, that the operation with a bank of circulation was different, owing to the fact, that such a bank, on being called upon by a depositor whose money had been loaned out, was not necessarily obliged to call in a corresponding amount from a debtor, but might be able to satisfy the depositor with its own notes, by which means the money out of doors would be temporarily increased to the extent of these notes, and thus create a corresponding excess.

Now, as the New York law absolutely prohibits the issue of any other notes than those which represent capital, and as these can not be multiplied ad infinitum, as notes can be comparatively under the old system, it is manifest that the banks organised under it, have not the power to augment the currency to the extent that the others have, inasmuch as, like banks of discount, they can only meet the claims of depositors by compelling some of their debtors to pay up a corresponding amount, it being understood, as in the case of those banks, that the usual stock of money is always to be kept on hand to meet occasional or unexpected demands. 12

In reference to the other provisions of the law, they must speak for themselves.13 If the numerous banks that have been organised under it, and which are daily increasing in number, act wisely, they will invest nearly the whole of their capitals in fixed securities14 and will be careful not to force into circulation a larger amount of their notes than the currency can readily bear without reaction. They will also take especial care, that in lending the money of depositors, they will discount nothing but business paper, having a short time to run, or they may, if overtaken by a panic, find themselves in the hands of the comptroller before they are aware of it.15

 

____________________

16 For a highly interesting and instructive history of the medium of trade, before the introduction of paper money into the American Colonies, and of the paper money issued by the various colonies, see “History of Paper Money and Banking,” by William M. Gouge.

17 See Gouge on Banking for a particular history of the continental paper money.

18 The notes of the Bank of England are made by law a legal tender, except in the payment of its own debts, but no such measures can be practised in the United States, where by the Federal Constitution, it is declared, that no state “shall coin money, emit bills of credit, make any thing but gold and silver coin a tender in payment of debts,” &c. The authority of Congress over the currency, is limited by the same instrument to the simple power, “to coin money, to regulate the value thereof, and of foreign coins.” In the exercise of this power, it authorised by act of 2d April, 1792, the coining of silver dollars to contain 371¼ grains of pure, or 416 grains of standard silver, (the standard being 892.4 thousandths) half dollars, quarter dollars, dimes, and half dimes, containing respectively, one half, one fourth, one tenth, and one twentieth part of the silver contained in the dollar; and by act of January 18, 1837, the coining of silver dollars, each to contain 371¼ grains of pure, or 412½ grains of standard silver, (the standard being raised by this act to 900 thousandths, that is, to nine parts pure to one of alloy) with the fractions of a dollar above enumerated, containing the same proportions.

It also authorised by act of 2d of April, 1792, the coining of gold eagles to contain each 247½ grains of pure, or 270 grains of standard gold (the standard being 22 carats, that is eleven parts pure metal to one of alloy, corresponding to 916 thousandths) half eagles, and quarter eagles, containing respectively, one half, and one fourth of the gold contained in the eagle; and by act of 28th June, 1834, the coining of gold eagles to contain each 232 grains of pure gold, or 258 grains of standard gold (the standard having by this act been lowered to 21.58 carats and a small fraction, corresponding to 899.225 thousandths) with the parts of an eagle above enumerated, containing the same proportions; and by act of January 18, 1837, the coining of gold eagles to contain each 232 grains of pure, or 258 grains of standard gold (the standard having by this act been raised to 21.60 carats, corresponding to 900 thousandths) with the parts of an eagle above enumerated containing the same proportions. When not of full weight, these gold coins are a legal tender at proportionate rates.

In reference to foreign coins, the laws have been frequently altered, there having been periods at which none but the Spanish dollar was a legal tender. That coin is still a legal tender, but, as it is worth in the market five per cent, more than the American dollar for exportation to China and some other countries, where it passes for more than its intrinsic worth, owing to its being there universally known, it is never now seen in circulation. Other foreign coins, however, are now legal tenders, as will appear from the following extracts from the laws:

By act of 25th June, 1834, it is enacted “That from and after the passage of this act, the following silver coins shall be of the legal value, and shall pass current as money within the United States by tale, for the payment of all debts and demands at the rate of one hundred cents the dollar, that is to say, the dollars of Mexico, Peru, Chili, and Central America, if not less weight than 415 grains each, and those re-stamped in Brazil, of the like weight, of not less fineness than 10 ounces 15 dwts. of pure silver in the troy pound of 12 ounces of standard silver; and the five franc pieces of France, when of not less pureness than 10 ounces and 16 dwts. in 12 ounces troy weight of standard silver, and weighing not less than 384 grains each, at the rate of 93 cents each.”

And by act of 28th June, 1834, it is enacted, “That from and after the 31st of July next, the following gold coins shall pass current as money within the United States, and be receivable in all payments by weight, for the payment of all debts and demands, at the rates following, that is to say, the gold coins of Great Britain, Portugal, and Brazil, of not less than 22 carats fine, at the rate of 94 cents and of a cent per pennyweight; the gold coins of France, nine-tenths fine, at the rate of 93 cents and of a cent per pennyweight; and the gold coins of Spain, Mexico, and Columbia, of the fineness of 20 carats 3 grains and of a grain at the rate of 89 cents and of a cent per pennyweight.”

There are no legal tenders now existing by law, but those enumerated.

In England, silver is not a legal tender for any sum exceeding forty shillings.

The following statement, by the Director of the U. S. Mint, showing the fineness and value of certain gold and silver coins, was communicated to Congress on the 7th April, 1840, by the Secretary of the Treasury.

GOLD COINS.

	Fineness in thousandths	Value pr. dwt.
Great Britain, sovereign,	915 5	cts.94 62
France, pieces of 40 and 20 francs,	899	92 92
Spain, doubloon and parts,	866	89 51
Mexico,     do.	866	89 51
Peru,          do.	868	89 71
Chili,          do.	868	89 71
Columbia, doubloons of Bogota	870	89 92
“         do.       of Popoyan	858	88 68
New Grenada, doubloons, 1837, ‘38,	871	90 02
Bolivia,                 do.	870	89 92
Central America, do.	830	85 79
La Plata,                do.	815	84 24
Portugal, johannes and half	914	94 46
Portugal crown (of 5000 reis) and half since 1838,	914	cts. 94 46
Brazil, piece of 6400 reis, of 1838,	914	94 46

SILVER COINS.

	Fineness in thousandths	Value pr. oz.
Spain, dollar of the peninsula,	900	cts.116 36
“     pillar dollar of Spanish America,	898	116 10
France, crown, (ceased to be coined in 1793),	909	117 53
“     five frank piece,	900	116 36
Mexico, dollar, average of various mints, and in the proportion usually presented here,	897	115 97
Peru and North and South Peru dollar,	901	116 49
Chili, dollar,	906	117 13
Central America, dollar,	896	115 84
Brazil, restamped dollar of 960 reis,	898	116 10

19 In May, 1837, just before the stoppage of specie payments, post notes of the Bank of the United States sold in Philadelphia, at a discount of 1 to 1¼ per cent. a month.

In the early part of October, 1839, before the second stoppage of specie payments in Philadelphia, they sold there at 1¾ to 2 per cent. a month.

20 By a statement made of the condition of the banks of Massachusetts, in October, 1837, it appeared that the cash deposited bearing interest was $5,318,484, whilst that not bearing interest was but $8,231,58).

21 If there be any private stipulation with a depositor whose deposites arise from his having been accommodated with discounts, that he is to leave a certain amount undrawn for, that amount is to be considered as a deferred debt of the bank, and not as currency.

22 During the contraction last referred to, which occasioned a panic that continued from October, 1833, to July, 1834, exchange upon London, at New York, the market of which regulates the rate for all the other cities, fell greatly below the ordinary limits. In February, 1834, the pressure for money was so great, that bills were sold, for a short period, as low as one to two per cent, below the nominal par of that period, which was, in reality, nine to ten per cent. below the true par. A great fall, also, took place in every species of stocks, property and merchandise, whilst the. discount on good commercial paper rose to two or three per cent. a month.

Notwithstanding this great pressure, however, it was not felt at all in England, except, perhaps, in the diminished remittances of merchants, so that her currency remained not only without the slightest contraction, but actually experienced an augmentation,23 to the great advantage of our shippers, whose cotton was sold without any reduction in price, as will be evident from the following quotations for uplands of the best quality, contained in letters from Liverpool houses of the greatest respectability.

1833.
October	30,	-	-	9d
November	23,	-	-	8¾
December	7,	-	-	8¾
December	31,	-	-	9½
1834.
January	4,	-	-	9½
February	24,	-	-	9
March	22,	-	-	9d
April	23,	-	-	9d
May	16,	-	-	9
June	7,	-	-	9½
July	8,	-	-	9½
August	23,	-	-	9½
September	30,	-	-	9¾

24Aggregate amount of notes circulated in England and Wales, by the Bank of England, by private banks, and by joint stock banks and their branches, at the following dates, as published in a table appended to the report of the Secretary of the Treasury of 3d January, 1837, on the condition of the state banks.

1833,	December 28,	£27,621,104
1834,	March 29,	28,735,827
“	June 28,	29,207,682
“	September 27,	28,591,112
“	December 28,	27,729,828

25 Tables of the imports and exports of gold and silver coin and bullion, for the last, five years.

I. GOLD BULLION.

					Imports.		Exports.
1834,	-	-	-	-	$141,181		none.
1835,	-	-	-	-	665,457		none.
1836,	-	-	-	-	1,913,137		$25,777
1837,	-	-	-	-	536,549		101,563
1838,	-	-	-	-	230,392		none.
					$3,486,716		$127,340

Total imports of gold bullion,	-	-	-	$3,486,716
Do. exports                 do.          -	-	-	-	127,340
Excess of imports,         -          -	-	-	-	$3,359,376

II. GOLD COIN.

					Imports.		Exports.
1834,	-	-	-	-	$2,786,006		$64,349
1835,	-	-	-	-	1,669,730		625,679
1836,	-	-	-	-	5,318,725		275,940
1837,	-	-	-	-	1,895,265		1,828,653
1838,	-	-	-	-	11,431,840		736,264
					$23,101,566		$3,530,885

Total imports of gold coin,	-	-	-	$23,101,566
Do. exports                 do.          -	-	-	-	3,530,885
Excess of imports,                -       -	-	-	-	$19,570,681

II. SILVER BULLION.

					Imports.		Exports.
1834,	-	-	-	-	$168,330		none.
1835,			-	-	765,283		none.
1836,	-	-	-	-	318,350		$52,695
1837,	-	-	-	-	594,291		5,600
1838,	-	-	-	-	392,843		2,500
					$2,239,097		$60,795

Total imports of silver bullion,	-	-	-	$2,239,097
Do. exports        do.	-	-	-	60,795
Excess of imports,                     -	-	-	-	$2,178,302

IV. SILVER COIN.

					Imports.		Exports.
1834,	-	-	-	-	$3,246,000		$413,681
1835,	-	-	-	-	10,040,000		5,122,495
1836,	-	-	-	-	5,850,669		3,624,186
1837,	-	-	-	-	4,490,309		2,756,914
1838,	-	-	-	-	5,630,138		2,292,342
					$29,257,116		$14,209,618

Total imports of silver coin,		-	-	$29,257,116
Do. exports             do.	-	-	-	14,209,618
Excess of imports,           -	-	-	-	15,047,498

RECAPITULATION.

Gain on gold bullion,	-	-	-	-	$3,359,376
Do.     do. coin,    -	-	-	-	-	19,570,681
Do.      silver bullion,	-	-	-	-	2,178,302
Do.     do. coin,	-	-	-	-	15,047,498

26 This power to increase the capital of a bank to any amount that may be agreed upon in the articles of association, is, I conceive, a defect in the law. We see every year banks applying to the legislatures to authorise an increase of their capitals, not because they can profitably employ more capital, but as a mere expedient to relieve themselves from embarrassments, by permitting their creditors, that is, the holders of their notes and deposites, to come into the concern as co-partners. It appears to me that just in the degree that there exists a standing law to authorise such a mode of relief, will there be a tendency to the expansion of the currency, and a facility afforded for bolstering up, too long, insolvent borrowers, the effect of which is to prevent matters from settling down upon the solid foundation which the interests of the community demand, precisely as there would be, if the law authorised the issue of post notes, which very properly it does not. This view of the subject is earnestly recommended to the consideration of the legislatures of the different states, which may, as that of Georgia has already done, adopt the New York system.

27 In this position the author is sustained by the opinion of Mr. McCulloch, whose celebrity as a political Economist, is well known throughout the United States, as employed in the following passages.

“It is quite illusory to expect to make any real improvement upon the system of country banking in England, by the mere introduction of a plan for allowing banking establishments with large capitals to be set on foot. There have always been, and are at this moment, a great number of such establishments in England. What is really wanted, is the adoption of a system, that will exclude the possibility of notes being discredited, by preventing all individuals or associations from issuing such as have not been guaranteed. * * * * “The truth is, as already stated, that it is not possible to guard against loss and fraud, from the proceedings of the country bankers, otherwise, than by compelling them to give security for their issues.” * * * The truth can not be too often repeated, that it is quite impossible ever to organise secure banks of issue—and it is with such only that the legislature has any right to interfere, except by obliging them to give security for their notes. Every other scheme, how carefully soever it may be devised, is sure in the end to prove nugatory and to be defeated.” McCulloch’s Commercial Dictionary edition of 1834, pp. 76, 77, 110.

“There is, in fact, but one measure that can give the public that guarantee to which they are entitled in dealing with country banks, and that is to compel them to give security for their issues. Nothing short of this will do. Women, minors, and individuals of all descriptions, who from their situation in life are no wise qualified to judge of the stability of different banking companies, are dealers in money; and, in point of fact, it is found, that the notes of the most worthless banks always, obtain some circulation, and generally, indeed, find their way into the pockets of those who are least able to bear the loss when the fraud is discovered. Government is bound to interfere to protect its subjects from such losses, and to make sure that all notes intended to serve as money, be they issued by one individual or by many, shall be paid when presented.” McCulloch’s. Statistical account of the British Empire, vol. II. p. 169, written in 1837.

The late Isaac Bronson, Esq. of New York, whose skill as a banker was exceeded by that of no financier in this country, entertained the same opinion, as appears from an article written by him in the year 1829, and published in the Free Trade Advocate of July 11th of that year, in which he employed the following language.

“It will be seen from the foregoing premises, that the proposition which the banker makes, or, is supposed to make, to the public (on issuing his bank notes) when stripped of its mystery, is simply this: ‘ I will exchange my credit for your capital, but you must allow me the use of your capital without interest, and yet pay me interest for the use of my credit. My credit will be of the same use to you as your money, and much more convenient; and your money, while in my hands I can make productive, which would produce nothing if it remained in yours: whenever you prefer your money to my credit, you shall have it.

“To this proposition the public replies; ‘ You shall have the use of my money on the terms you propose; but in a bargain so advantageous to yourself, it will be expected, as you have my money without interest, that you will give security to return it without loss.’”

28Book II, Chap. 1.

29 A clear illustration of the difference here adverted to, is contained in an unpublished pamphlet on the reform of the currency of England, which the author has read, in the following paragraph:

“The business of banking is one thing: that of issuing a paper money is another thing. There is no necessary connection between the two. The bankers in London and Paris are bankers strictly so called. They are lenders of their own and of other people’s money. They must obtain it by industry or loan before they can lend it. They do not make it. The business of making and then issuing a paper money on loan, is very different from that of obtaining a paper money on loan, and then re-lending it.”

30 A copy will be found in the Appendix, marked D.

31 The whole of the capital of the Bank of England is invested in a loan to the government, and no part of it ever appears in the monthly statements of the assets and liabilities of the bank.

32 For an account of the practical working of this system, see Appendix J.

• 1* According to the report of the secretary of the treasury of April, 1840, the number was 901, with a paid up capital of near $360,000,000. See Appendix C.
• 2* Book I. Chap. 4.
• 3† This expression must be qualified thus. Every emission of a paper currency in any country drives out a portion of its coin, and augments the total amount of the currency of the world, in the same manner that an additional quantity of gold and silver from the mines would do it; and hence an emission of paper money any where must augment the currency every where, after time has been afforded for the distribution.
• 4* I am aware that the usual practice of banks is to call in their capitals by instalments, and to lend out those instalments as fast as received, which is undoubtedly the best mode, if the loans were not so apt to be made to needy or speculating stockholders, to enable them to pay up the subsequent instalments.
• 5* If it be objected to this proposition, that the losses of the banks in the United States are comparatively few, I would reply, that this result is to be ascribed to the absence of a general bankrupt law, which would prevent those partial assignments for the benefit of endorsers at bank, by which banks become preferred creditors in most cases of insolvency, and thereby get a larger share of the assets of their debtors, than other creditors.
• 6* The depreciation of a currenny when it takes place must necessarily show itself in reference to every species of property and commodity, although it takes longer to reach some things than others, so as to occasion a change in their price. A depreciation of the currency, in reference to particular things only, cannot be supposed, any more than a rise of the tides in reference to some particular objects on the margin of a river, and not to all others.
• 7* Strictly speaking, the export would not be quite equal to the amount of the paper issued, for the reason assigned in the second note to this chapter, page 73.
• 8* The banks of Pennsylvania, and perhaps most other states, are authorised to charge one per cent, interest for sixty days, and to receive it in advance. Individuals can only charge six per cent. per annum, without the right to receive it before hand, but the law in this case is seldom observed.
• 9* Except in those cases where deposites constitute a large portion of the amount loaned by the bank.
• 10* To this circumstance may also be mainly ascribed the practice which of late years has generally prevailed of long credits on merchandise sold. Eight months are now given, where formerly only four were required, the effect of which is to double the stocks of dealers who buy on credit, and to double the amount of outstanding debts. When long notes are discounted by banks, long credits will be given by the merchants.
• 11* The discount will of course be deducted.
• 12* Whenever gold and silver legal tenders are both saleable at a premium, it is proof of the absence of true convertibility.
• 13* Mr. McCulloch in his Commercial Dictionary, edition of 1834, pages 109 and 110, has the following remarks. “Bad as our system of country banking undoubtedly is, we should be exceedingly sorry to see any attempt made to improve it, by the adoption of even the best parts of the American system!” * * * * * * “That part of the American system which limits the responsibility of the partners in a bank to the amount of their shares, seems to us to be in the last degree objectionable. It affords a strong temptation to the commission of fraud, and we have yet to learn, that it possesses a single countervailing advantage. We have been assured by those well acquainted with the facts, that it has been productive of the most mischievous consequences.”
• 14* The banks of New York are prohibited from issuing post notes. Some of those of Philadelphia entered very deeply into this branch of business in the years 1838 and 1839, abroad as well as at home, and became greatly embarrassed by it.
• 15* The following article which appeared in a newspaper in December, 1839, is important as regards this practice.
• 16In the nine hundred banks and branches which now exist in the United States,* all the operations of these three distinct institutions are combined; and it is owing to this combination, by which dissimilar things are confusedly mixed together, that the public mind has been led into so much error upon the subject of banking. An analytical examination can alone enable any one to understand the true merits of this important subject.
• 17IN a former part of this treatise* it was shown, that under a metallic currency, it is not possible to retain in any country, for any length of time together, a larger amount of coin than that which is requisite to place its currency upon a level with the currencies of other countries; and it was also shown, that if by any extraordinary cause a greater amount should at any time be brought into any country, it would continue but for a short time, and would gradually disappear by exportation, in the manner there described, until the equilibrium should be restored.
• 18What is true of a metallic currency, is equally true of a mixed currency, consisting of coin and paper exchangeable for coin on demand. The aggregate amount of the two component parts cannot exceed for any great length of time, the amount of coin which would circulate if there was no paper, as I shall now proceed to show.†
• 19Let us suppose that, in a particular country, enjoying a metallic currency, the quantity of coin requisite to circulate its products and commodities, and to maintain its currency upon a level with the currencies of other countries, is ten millions of dollars, and that the balance of trade and payments is such at the time of our supposition, that the exchange is at par. A bank of deposit, discount and circulation is established upon the corporate or joint-stock principle, with a capital of one million of dollars in coin, which amount is of course to be taken from the ten millions in circulation. We will suppose this capital all to be paid in before the bank commences its operations. The effect of this would be a temporary pressure for money, by withdrawing one million of dollars from circulation. This pressure, however, would be gradually relieved, as the bank commenced discounting, and would wholly disappear after it had loaned out a million of dollars.* Now it is manifest, that up to the period at which the loans of the bank do not exceed one million of dollars, its operations have been simply those of a bank of discount, for it has only loaned the amount of its capital, that is, of money previously existing. It may indeed, have issued notes, or given credits on its books for loans made, instead of paying out the identical gold and silver received from the stockholders; or, it may have given notes, or credits, on a deposit of coin for the convenience of the public; but such notes and credits in such cases would be mere certificates that corresponding amounts of gold and silver were lying in the vaults of the bank, belonging to the owners of such notes or credits, held subject to their order, precisely as in the case of special deposites. It might even happen, that millions of dollars in the form of notes and credits might be issued by the bank in exchange for specie, without thus far exercising one single prerogative of a bank of circulation, or influencing in the slightest degree the state of the currency, any more than the Bank of Hamburgh, already described, influences the currency of that city.
• 20From this view of the subject, how clear is to be seen that what the bank has thus far performed, is nothing more than what the individuals who own the capital of the bank, could themselves have performed more cheaply, quite as securely, and perhaps more advantageously to the public, seeing that loans to unskilful and imprudent borrowers, of which individuals are not so apt to be guilty as corporations, lead to a diminution of the wealth of a country, whether it result from injudicious voyages, or from any species of enterprise which converts productive capital into properly which is not equally productive, or, from improvident sales of merchandise to persons not entitled to credit. Incorporated or joint stock banks, it is thought, owing to their directors not having a deep personal interest at stake, and owing to their liability to be influenced as a board, by considerations which do not operate upon individuals, and especially owing to the absolute impossibility of their devoting any large share of their time to the investigation of the characters of all applicants for loans, cannot, in the nature of things, exercise the same discrimination in the choice of its borrowers, as individual capitalists do.*
• 21The circulating principle is now put into operation by our supposed bank, by lending its credit in addition to its capital. In other words, without having any more money to lend, it undertakes to discount notes at short periods, by giving to the borrowers not coin, or notes or credits absolutely representing coin in its vaults, as in the case of its original loans, but notes or credits promising to pay gold or silver on demand, founded upon a presumption that no such demand will be made, until the notes, in the discount of which they were issued, or some of the other notes discounted by the bank, will be paid, and thus bring into its coffers an equal amount of specie. In other words, the bank lends its credit, and as this credit is just as valuable to any of the parties who are indebted to the bank for the first million, or for any subsequent sum loaned, as gold or silver, any of them will be willing to receive it in payment of debts or for merchandise sold, as readily as coin, and the notoriety of this fact, added to the right of conversion on demand, gives the notes and transferable credits of the bank a circulation with the public equivalent to coin. Every emission, however, of these bank notes and credits is an augmentation of the currency, and depreciates it below the general level.* Let us, for the sake of argument, suppose the amount of this augmentation to be extended in a given time to one million of dollars, that being the sum requisite, we will further suppose, to occasion the degree of depreciation that must exist before it is profitable to export coin. The amount of the currency will then be eleven millions of dollars, that is to say, ten millions of coin, and one million of paper. The effect of this would inevitably be what is called a plenty of money. The prices of all commodities would rise, because there would be eleven purchasers in the market, where before there were but ten, or, what amounts to the same thing, because the former purchasers would possess one tenth more means to purchase with, than they possessed before. This rise of prices, operating upon foreign as well as domestic commodities, would lead to the importation of additional quantities of foreign merchandise. But no corresponding export of domestic products would take place, on account of their artificially high price, upon which bills could be drawn to pay for the foreign imports; and the consequence would be, that money would be sent abroad in their stead, as presenting the most profitable species of export. But of the money in circulation, it is evident that nobody would think of exporting the paper, which would have no value abroad, and consequently, all the exports that would take place, would be of coin.
• 22The effect just described would as certainly take place as that water would find its level, and would continue until the export of coin was equal to the amount of the paper issued, that is, to one million of dollars, when the level would be again restored, owing to the fact of the aggregate of the coin and paper united being only ten millions of dollars, that is, nine millions of coin and one million of paper.* Further emissions of bank notes or credits might then take place with precisely the same results, and provided that the extent to which the issues are carried is not so great as to drive out of the country too great a portion of the metallic currency, by which the convertibility of the paper into coin in case of a sudden panic occasioned by foreign war or domestic disturbance, or by fear of insolvency, might be endangered, the operations of the bank are decidedly beneficial to the country. It has disengaged from a comparatively unproductive employment, a capital capable of producing an annual profit to the nation equal to the average profits of capital, or, in other words, has substituted an expensive instrument of commerce by one costing less. And yet, by this operation, no permanent depreciation of the currency takes place, because the total quantity of coin and paper united is only equal to the quantity of coin that would have circulated had there been no bank.
• 23* From the period of the Independence of the United States up to about the year 1823, nearly all their imports from China and India were paid for by an exportation of silver dollars, brought into the country in addition to the supply required for the currency. Since the year mentioned, the chief part of the China and India cargoes, are paid for by credits or bills on London, exports of manufactures, and by coin procured in Europe.
• 24What proportion the supply of the precious metals which each country secures to itself as a circulating medium bears to its wealth, its population, its trade, or, to the existing state of confidence or credit, it would not be easy to ascertain: nor is it indeed necessary that it should be ascertained, as far as any practical good can result from the knowledge. Those who carry on the operations of trade will take care that a country has neither too much nor too little of them, and it may be assumed as a safe position, that when the precious metals neither flow out from a country in which there are no gold or silver mines, nor flow into it faster than is incident to her additional share of the new annual production of the mines, she has her exact proportion. These proportions, when once attained as nearly as the nature of circumstances will permit, establish what may be called the general level of currencies, and it is to this level, as to a species of standard, that reference is made, when we say that money like water will find its level. It is true, that owing to the constant production of the mines, which may at times occasion unequal distributions, or, distributions other than through the accustomed channels, as was the case after the revolutions in Spanish America took place, which caused to be sent first to the United States or England, the metals which formerly all went to Spain, as well as to a great variety of other circumstances which disturb the currency of particular countries, this level may never be a perfect one. It is sufficiently so, however, for all purposes of reasoning upon it, and perhaps as much so as fully warrants the figure by which a fluid-like property is ascribed to the precious metals. The surface of the ocean is never free from undulation, and the daily operation of the tides is constantly interfering with its level, as well as with that of rivers. Moral causes, operating like the physical causes which influence the movement of the waters, operate upon gold and silver, in driving them from one place to another, but it is easily to be seen, that were the extent of wealth, population, commercial transactions, and confidence, in all countries to remain the same for a long period together, and were the new productions of the mines to be distributed in due proportions, and the old stock in each country to be diminished by consumption in an equal ratio, gold and silver would assume such a uniformity of exchangeable value, as to arrive at a perfect state of quiescence. Indeed, as it is, gold and silver are of all commodities the least likely to be exported from any country, except from those in which they are produced, and where of consequence they form a portion of the produce of the land and labor of the people, as iron and lead do in some other countries; or, from those which, in addition to their supply for the purpose of currency, have possessed themselves of an amount specifically intended for exportation to countries having products not procurable by any other means than by purchase with gold and silver.* We may therefore conclude, that a level does exist, created as will be seen hereafter, by the imports and exports of commodities other than the precious metals themselves, towards which the currencies of all countries have a perpetual tendency, and from which, if they do not precisely conform to it, they do not greatly depart.
• 25IT has been shown that banks of discount upon the corporate or joint-stock principle could not generally he conducted to a profit, seeing that the income they derive from the loan of capital would not be as great as the income which the individual proprietors could have derived from lending their money without the agency of salaried officers and the rent and other expenses of a banking house. It has also been shown, that for the same reason, banks which perform the double function of banks of discount and banks of circulation, can make no banking profit by the mere lending of their capitals. All their profits are derived from lending their credit; for, although where the rate of interest is six per cent. per annum, the practice of taking the interest beforehand, and charging sixty-four days discount for the use of the money for sixty-three days, as in Philadelphia and other places, the actual rate received is 6 per cent., yet the additional four-tenths of one per cent, do not pay the proportion of the whole expenses of the bank, which the amount of its capital bears to the whole amount of its loans. Indeed, a little reflection will enable any one to perceive, that not only do all the profits beyond legal interest of a bank of discount and circulation, where it is successful, arise from the loan of its credit, but those profits must besides furnish a fund for making up the loss incident to the lending of its capital. Thus, if we suppose a bank of discount and circulation with a capital of one million of dollars, having loans out to the amount of one million and a half, and the whole annual expenses of the bank to be fifteen thousand dollars, or one per cent, upon the amount of the loans, it will be seen that two thirds of this expense attaches to the lending of the capital, and only one third to the lending of the credit of the bank, so that if separate accounts were kept of the expenses of each department of the institution, they would show a gain upon the lending of credit and a loss upon the lending of capital. If, therefore, the whole operation be profitable, the profit must arise from the lending of credit, and must consist’ of what remains after defraying the loss incident to the lending of the capital, which is precisely equal to the excess of the expenses of bank agency in loans over those of private agency, deducting the four-tenths of one per cent, which a bank charges, more than individuals would have a right to charge by law on loans.* At all events, no one will pretend that banks make more by the loan of their capitals than individuals could make, and even on this admission it is apparent that all the peculiar profits of what is usually called banking arise from the loan of credit.*
• 26IT has been shown that banks of discount upon the corporate or joint-stock principle could not generally he conducted to a profit, seeing that the income they derive from the loan of capital would not be as great as the income which the individual proprietors could have derived from lending their money without the agency of salaried officers and the rent and other expenses of a banking house. It has also been shown, that for the same reason, banks which perform the double function of banks of discount and banks of circulation, can make no banking profit by the mere lending of their capitals. All their profits are derived from lending their credit; for, although where the rate of interest is six per cent. per annum, the practice of taking the interest beforehand, and charging sixty-four days discount for the use of the money for sixty-three days, as in Philadelphia and other places, the actual rate received is 6 per cent., yet the additional four-tenths of one per cent, do not pay the proportion of the whole expenses of the bank, which the amount of its capital bears to the whole amount of its loans. Indeed, a little reflection will enable any one to perceive, that not only do all the profits beyond legal interest of a bank of discount and circulation, where it is successful, arise from the loan of its credit, but those profits must besides furnish a fund for making up the loss incident to the lending of its capital. Thus, if we suppose a bank of discount and circulation with a capital of one million of dollars, having loans out to the amount of one million and a half, and the whole annual expenses of the bank to be fifteen thousand dollars, or one per cent, upon the amount of the loans, it will be seen that two thirds of this expense attaches to the lending of the capital, and only one third to the lending of the credit of the bank, so that if separate accounts were kept of the expenses of each department of the institution, they would show a gain upon the lending of credit and a loss upon the lending of capital. If, therefore, the whole operation be profitable, the profit must arise from the lending of credit, and must consist’ of what remains after defraying the loss incident to the lending of the capital, which is precisely equal to the excess of the expenses of bank agency in loans over those of private agency, deducting the four-tenths of one per cent, which a bank charges, more than individuals would have a right to charge by law on loans.* At all events, no one will pretend that banks make more by the loan of their capitals than individuals could make, and even on this admission it is apparent that all the peculiar profits of what is usually called banking arise from the loan of credit.*
• 27The mode in which a bank lends its credit is to exchange its own promissory notes payable on demand, for the promissory notes or acceptances of individuals payable at a future period, deducting the interest for the time which the latter have to run before they become due, and allowing no interest on its own notes for the time that may elapse before their payment is demanded. In making this exchange, the profits of the bank depend entirely upon the length of time that its notes remain abroad, and its ability to meet them depends of course upon the length of time which the notes have to run in exchange for which they were issued. If bank notes be issued only upon the principles laid down in a former chapter as mere substitutes for coin exported, and without augmenting in any degree the amount of the currency, they will remain in permanent circulation, unless in case of a panic, or discredit, which occasions a run upon the bank, and will constitute a source of permanent profit; for although some of them may be constantly returning in payment of debts, yet they are sent out again as fast as they come in, in the discount of other bills or acceptances. As to the length of time which the discounted paper should have to run, experience must decide, the bank having regard to the possibility of a panic, as well as to the action of other neighboring banks, seeing that an over-issue by anyone of them, by depreciating the currency, may occasion a temporary reaction upon other hanks as well as itself, and disturb even those that are the most prudently conducted. The practice of the banks in the United States prior to the war of 1812, was generally to limit their loans to paper not having more than sixty-three days to run. Since that time, loans have been made at longer periods, extending sometimes even to four and six months, and to this circumstance is no doubt to be ascribed, in a great degree, the frequent revulsions that have since taken place in our currency, and especially that which eventuated in a general stoppage of specie payments in May, 1837.* It must be manifest, that the power of a bank to meet any extraordinary emergency must depend upon the command it has over its loans, and if the experience of other countries can be considered as any guide, that of England and France may both be referred to, where discounts of paper having more than sixty or a hundred days to run, are wholly discountenanced. A similar practice in the United States could not fail to be productive of much benefit to the community, as a means of correcting with promptness any accidental expansion of the currency.
• 28Let us suppose a bank with a capital of one million of dollars. After this is all loaned out, it is very evident that the bank has no more capital to lend. A offers a note for discount, having sixty days to run, for one thousand dollars, and the bank discounts it, by giving one thousand dollars of its own notes payable on demand.* These notes, as I have shown, are not capital, but a promise to deliver capital, and it is only because the bank supposes that no demand will be made upon it before the expiration of sixty days, when A’s note will become due, that it considers itself safe in exchanging notes with A for that length of time. If the notes come back for payment before A’s note is paid, it is evident that the bank cannot fulfil its promises to deliver capital, without borrowing from same one else, or without compelling some of its other debtors to pay, and what is true of A’s note is true of all the other notes which the bank may discount in exchange for its own notes.
• 29The duties which the public have to perform, as a check upon this perpetual tendency to over-issue, are incumbent on every citizen; and he who withholds his co-operation, when he has a motive to act, becomes a participator in the wrong. They are, simply, for every man who wishes to convert bank notes or deposites into coin, either for the purpose of convenience or exportation, and whether the amount be large or small, to make his demand without being influenced by fear, favor, or affection, or through any false or mistaken delicacy towards the directors of banks, or their debtors who might in consequence thereof be called upon for an earlier reimbursement. Here, again, unfortunately, experience demonstrates, that the independence and moral firmness of most merchants is not proof against the influences which may be brought to bear against them. On the one hand, they find their discounts interfered with, and their commercial operations crippled; whilst on the other, they discover that a clamor is raised against them by those debtors to the banks who purchase commodities from them, as soon as they feel the pressure occasioned by a diminution of discounts, consequent upon a heavy demand for specie.*
• 30The only true resort, therefore, that can be appealed to for absolute convertibility is legislation. But how is this legislation to be expressed? By forfeiting the charters of banks that do not pay their notes. The legislature of New York in May, 1837, absolved its bank’s from this penalty for one year. By imposing a penalty of twelve or twenty-four per cent, per annum, upon notes and deposites not paid in coin. Such provisions were wholly inoperative in those states where they prevailed, during the late general suspension, by the evasion of the banks, and by popular clamor raised against individuals who demanded their rights, and cannot be relied upon, either to prevent a general stoppage, or to enforce a resumption with promptness. The true and only answer is, by establishing individual liability, such as that which exists with all the joint-stock banks of England, and all the private banks of that country as well as of Europe.*
• 31The practice of discounting notes, and instead of giving cash for the net proceeds, giving post notes payable at thirty or sixty days date, by which means the bank gains a profit equal to the interest for the time the note has to run. In other words, if a bank discounts a note having ninety days to run, and gives in exchange for it a post note payable in thirty days, it receives interest for ninety days for the loan of money for sixty days, inasmuch as the post note is not money until it becomes due, as will hereafter be shown. The extent to which this practice has been carried throughout the United States is very great, and it is defended upon the ground that the emission of post notes enables merchants who have remittances to make to distant points, to effect that object more securely and conveniently than by the transmission of bank notes payable to bearer, on account of the security afforded by the former’s being only transferable by endorsement. This is true, but it is manifest that this end would be as completely attained by a post note payable in three days after date, as by one payable in sixty days. But this is not all. Post notes at long dates, not only enable banks to profit by evading the laws against usury, but they enable banks to raise money for their own use when they are embarrassed, without appearing to borrow, a facility which renders them less careful of expansions of the currency than they otherwise would be.*
• 32The practice of discounting domestic or inland bills of exchange, by which advantage has been taken under the color of exchange, to charge, besides the legal interest, and a fair charge for collecting, the most extortionate rates of profit, having no real relation to the actual expense of collecting, but only to the necessities of borrowers.* In the examination, by a committee of the legislature of New York, in 1838, of the affairs of one of the city banks, some gross malpractices of that institution were developed. It was proved to have charged from five to ten per cent, exchange on the collection of drafts, when the market rate of exchange on similar drafts was not more than from three to six; had discounted paper with the express understanding that the party accommodated was not to receive cash for the net proceeds, but a draft at par upon some distant place, worth in the market one to three per cent, less than the rate at which it was taken; and had even purchased back their own drafts at such a rate of discount. What this bank did, has been done, more or less, by a large portion of the banks in the United States, and the evil has become so extensive that funds which should be devoted to the discounting of real paper payable on the spot, have been diverted to the purchase of fictitious bills, created for the very purpose of raising money, and not in the ordinary course of trade.