The North American Review.
Volume 141, Issue 346
September 1885

 

Our National Banking System

by

Edward H.G. Clark.

 

 

ONE day, some ten years ago, I met my revered friend, Wendell Phillips.  He had been talking about the greenback.  “Mr. Phillips,” said I, “what is the point of this discussion ?  What can be better money than a good bank bill with a gold dollar behind it ?"  “Ah !” he replied, “that would be pretty good money if it were not a lie.  But the whole thing is a false pretense—a swindle.  The gold dollar is never behind the dollar bill, except just when no one wants it.  The moment it is really needed it is not there, and can’t be there.  Why ?  Simply because the world’s trade, despite all the aids of the most recent and improved banking, properly requires, say, ten times as much currency as both gold and silver furnish.  The two metals comprise some six thousand millions of dollars each—twelve thousand millions in all.  That is the total accumulation of the ages.  But the world can’t do business, can’t exchange its commodities, without using more than a hundred thousand millions of currency.  So the gold and silver will not go around.  If one country has enough, some other is drained and cornered.  Paper money was invented to overcome this difficulty.  But, if there is only one metallic dollar behind ten dollars in bank-bills, or five, or three, why not recognize the fact, and not promise an impossibility, specie redemption on demand ?  The great lie called 'specie basis' has destroyed the commercial prosperity of the United States once every six years since the nation started.”

 

I recall my first real lesson in finance, not merely to point a bit of narrative, but because Mr. Phillips pierced the heart of the subject at one thrust.  Seven hundred years ago the civilized world gave up the attempt to float its rising commerce on the two baby-rafts, gold and silver coin, and started the Bank of Venice.  The books of that bank, in 1171, contained the whole principle of the United States treasury-note, the only kind of paper money that will ever be fit for issue under any stable government, until civilization outgrows the use of metallic currency.

 

Venetian money consisted of coin and paper.  The State stood behind the paper and made it better than gold: first, by holding the volume strictly within the demands of trade; and, second, by redeeming it at par with coin in all public dues and private debts.  Venice issued no treasury-notes, as we employ that term, and no engraved bank.bills.  She needed a loan for war, as did the United States twenty-four years ago, and she forced her wealthiest citizens to advance it.  Then she made the lenders the managers of the loan, and allowed them four per cent. a year on it.

 

They started a bank, and opened their ledgers.  They made their whole stock divisible and transferable, and began to sell.  But this arrangement converted the bank capital into a circulating medium for all the wholesale transactions of Venetian commerce, with a volume only limited by the rapidity of transfer.  Everybody wanted a slice of the stock, for it was legal tender.  Thus the divisible inscriptions of the Bank of Venice became the currency of Europe.  Interest on it was abolished, for the people needed to use more than they could get, and they soon came to regard it as a permanent tool of trade, the cheapest and best that could be devised.  Venice used it for nearly six centuries without one commercial panic.  This method of furnishing a country with a currency is to supplement nature’s shortage of gold and silver with government credit, not redeemable in coin on demand, but made legal tender for all public and private dues, and around.  If one country has enough, some other is drained and cornered.  Paper money was invented to overcome this difficulty.  But, if there is only one metallic dollar behind ten dollars in bank-bills, or five, or three, why not recognize the fact, and not promise an impossibility, specie redemption on demand ?  The great lie called "specie basis" has destroyed the commercial prosperity of the United States once every six years since the nation started.”

 

I recall my first real lesson in finance, not merely to point a bit of narrative, but because Mr. Phillips pierced the heart of the subject at one thrust.  Seven hundred years ago the civilized world gave up the attempt to float its rising commerce on the two baby-rafts, gold and silver coin, and started the Bank of Venice.  The books of that bank, in 1171, contained the whole principle of the United States treasury-note, the only kind of paper money that will ever be fit for issue under any stable government, until civilization outgrows the use of metallic currency.

 

Venetian money consisted of coin and paper.  The State stood behind the paper and made it better than gold:  first, by holding the volume strictly within the demands of trade;  and, second, by redeeming it at par with coin in all public dues and private debts.  Venice issued no treasury-notes, as we employ that term, and no engraved bank-bills.  She needed a loan for war, as did the United States twenty-four years ago, and she forced her wealthiest citizens to advance it.  Then she made the lenders the managers of the loan, and allowed them four per cent. a year on it.

 

They started a bank, and opened their ledgers.  They made their whole stock divisible and transferable, and began to sell.  But this arrangement converted the bank capital into a circulating medium for all the wholesale transactions of Venetian commerce, with a volume only limited by the rapidity of transfer.  Everybody wanted a slice of the stock, for it was legal tender.  Thus the divisible inscriptions of the Bank of Venice became the currency of Europe.  Interest on it was abolished, for the people needed to use more than they could get, and they soon came to regard it as a permanent tool of trade, the cheapest and best that could be devised.  Venice used it for nearly six centuries without one commercial panic.  This method of furnishing a country with a currency is to supplement nature’s shortage of gold and silver with government credit, not redeemable in coin on demand, but made legal tender for all public and private dues, and kept at par with coin, or above it, by strictly commanding the volume.

 

But, in 1695, the Bank of England inaugurated another method of helping out nature in her deficiency of bullion.  It was to inflate the notes of the bank far beyond their backing in coin, yet promise specie conversion on demand.  It was known that no such promise could be kept if the demand should become general;  but it was “guessed” that the notes would never be presented all at one time, and thus break the bank’s “specie basis.”  Thus the British banking system, with its whole line of offspring, was conceived in a miscalculation, and has become just what Wendell Phillips called it, a stupendous lie.  But it was foisted on the American colonies and the United States, and from 1789 to 1861, under the old State banks, it brought us to commercial ruin five times in each generation.  The way of doing it was simple enough.  Trade was tempted into activity by discounting business paper, and exchanging bank-notes for it.  Then came the periodical drain of specie by the world’s great gold-sucker, the Bank of England;  and then the American banks, to hold on to some reserve of coin for the redemption of their bills, were forced to stop discounts, put up the rate of interest, and precipitate a panic.  In such a panic, a few cunning Shylocks, who understood the game, were always found to have all the specie afloat, and thus to hold the power of measuring all other values by their little hoard, and buying up everything at their own price.  This done, the banks generally suspended specie payments and began a new deal.

 

Our national banking system to-day is as good a thing, perhaps, as could possibly be derived from such a source—the great British confidence game of specie basis, inflation, and suspension.  In memory of the State banks, these national banks are deservedly popular.  They furnish a uniform currency, good in all parts of the country, and the bill-holders are thoroughly secured.  In general, the banks are managed by honest and able men.  But the very name “national” bank implies the one overwhelming objection to the thing as it is, which is not national.  In our day, there is no excuse for any nation that does not issue and control the money of its people, in the whole common interest, as a direct function of government.  No function is more vital.  To distort a currency fills hearses and opens graves.  Our nation shirks its duty, and relegates the function to an association of individuals.  “The National Banking Association” is a private monopoly.

 

The small bonus of double interest—five or six millions of dollars—which the banks now get from the people is not worth talking about; but the banks are conducted for the private gain of their stockholders, who can, at will, inflate or contract the people’s money, and thus set the value of all property.  Fortunately, the “specie basis” of the national banks is now chiefly paper—the “rag-baby ”—three hundred and forty-six millions of greenbacks !  This circumstance at last prevents our foreign trade and the Bank of England from dictating exactly when an American merchant or manufacturer may get his business notes discounted.  Those greenbacks fight off our old-fashioned panics.  But, while our treasury-note is the gold-redeemer of the bank-bill, the Government, if called on, must redeem its own notes in the gold itself.  These notes are held by the banks.  So, a sufficient combination of national bankers can break the United States Treasury at any time during an outward drain of specie.  They may never do it.  But how simple-minded are the “great American people” to take the risk !

 

Let us have honest money.  In 1861 Thaddeus Stevens planned it perfectly, as far as honest money can be instituted in connection with metal.  The civil war was to be fought on Government credit, and paid for in taxes.  In the meantime the people would need about a thousand millions of currency beyond all the specie then in the country.  What better currency could they possibly have than Government notes, redeemable in taxes; that is, in the people’s own inevitable debts ?  There could be only one danger in such money.  Overissue would depreciate it, because overissue, and that only, will depreciate any money.  Against this contingency an interest-bearing bond was placed, to absorb, at need, any excess of the circulation.  The Government paper, both currency and bonds, was ultimately redeemable in coin.  But Thaddeus Stevens was long-headed enough to see that such a money would constantly redeem itself; and there would be the end of the “specie basis.” He simply revived the money-tool of Venice, which was no experiment, but which had been approved by the unbroken practical success of more than five hundred years.  Our House of Representatives adopted it by a large majority.  But the blind and raw Senate of that day spoiled it.  They made a greenback not redeemable in duties on imports or interest on the public debt, and so not placed by the nation that issued it at par with coin.  That “blunder worse than a crime” enabled the foxy gentlemen of the specie basis to corner the whole credit of their country, which had to be dumped into Wall Street, at any price it would bring, to buy the gold which they alone held.  They doubled the national debt—as Mr. Spaulding, since President of the National Banking Association, prophesied—and their handiwork has cost the rest of their countrymen more than five billions of dollars.

 

But if the greenback is now the “specie basis” of the banks, it is good enough for the American people.  Gold is “the money of the world” (in spots), only because certain nations have made it such.  Should all the world demonetize it, seventy per cent. of its value would drop out in a day.  As ours is a silver-producing country, let us make silver as valuable as possible, by full monetization, but recognize a complete “bi-metallic solvent.” Bi-metalism will save us from being the plaything of London and Hamburg.  But, with what gold and silver we can keep in the country, let us have all the treasury-notes that can be held at par with the specie.  To that extent our paper circulation should absorb our bonds, and save interest on the national debt.  Bankers will have plenty of room for their very useful business; but when they loan money, it will be really national money—gold, silver, and treasury-notes.


EDWARD H.G. CLARK.