William Gouge
An Inquiry

Effects on Credit.

In a rising country, sound credit is of equal importance with sound currency.  Through its operation, the advantages of capital are more equally diffused than would other wise be possible.  The man who has more capital than he wishes to employ in his own business, and the aged and infirm who possess wealth, lend it to the young and active.  By these means, much capital is made productive, which must otherwise have remained unproductive;  and many persons find employment who must otherwise have been idle.  The wealth of the nation is increased, and lenders and borrowers are mutually benefited.  The former receive their just share of profits, in the shape of interest;  and the latter keep another share as a recompense for the trouble of management.

To have a system of sound credit, nothing more is necessary than to have a sound money system, and to enforce the faithful performance of honest contracts.

In the countries forming the present United States, credit has never been perfectly sound.  In an early period of our colonial history, arbitrary alterations were made in the legal valuation of the current coin.  Then came the paper money of the Provincial Governments, and the Continental money of the Revolutionary Congress, together with tender laws, supported by penal enactments.  Men of property were careful in making loans, as they knew not but that, between the time of lending and receiving back, such alterations might be made in the currency, that they would be paid in money of much less value than that which they lent.

Notwithstanding this, as business was much less uncertain than it is now, men whose moral character was such as to afford a guarantee that they would not take advantage of unjust laws to injure their creditors, found little difficulty in borrowing.  But moral character is no longer security for the re-payment of loans;  for, the sudden vicissitudes of fortune, which are produced by the Banking system, make very great changes in the moral feelings of men.  Many a one who has, while his affairs are prosperous, every disposition to fulfil his engagements, becomes very careless about them, when he finds his affairs declining.

As industry and economy no longer insure success in business, nothing short of real estate is regarded as adequate security for the re-payment of a loan.  This security many men, in whose hands capital would be very productive, are unable to give.  And thus, while the rich are prevented from lending their funds in the manner which would be most advantageous to themselves, not a few industrious and enterprizing persons are prevented from exerting their faculties in the way which would be most beneficial both for themselves and for the community.  Some, from the impossibility of obtaining capital to work with, are like mechanics without tools – useless both to themselves and to the nation.

This practice of lending on bond, to which Banking has nearly put an end, was, perhaps, more advantageous to the country, than any other kind of lending.  Men who have real estate, could find means for employing their faculties to advantage, even if they were not able to borrow on mortgage.  They might till their farms, if their real estate consisted of farms;  or if it consisted of houses, they might, by renting their houses, obtain capital enough to engage in some active business.  But men having no capital of their own, and unable to borrow, must, unless employment is afforded them by others, remain in absolute idleness.

It is now, indeed, possible for such men to borrow from the Banks, if their indorsers please the Directors.  But the loans of the Banks are for 60 or 90 days, while months, and even years, are required for bringing the enterprizes of the farmer and the mechanic to successful completion.  Short loans are useless to them.  The Banks may, indeed, renew the accommodation, but this depends on contingencies;  and the curtailments in time of pressure are so ruinous, that a man acts very unwisely who borrows large sums from the Banks, or who borrows them for a long period.

When Dr. Franklin arrived in this city, more than a century ago, he was a poor and friendless journeyman printer.  The amount of loanable capital held by the Philadelphians was small.  Yet, he had been here but a short time, before his neighbors, without solicitation on his part, offered to lend him money to establish him in business.  A thrifty young mechanic who should now attempt to borrow 500 or 1000 dollars, for a term of two or three years, on his personal security, would be regarded with astonishment.  Yet this young mechanic has a capital in his faculties which would entitle him to a loan of more than 500 dollars, if the state of credit were sound.  If his labor yields him six dollars a week, and his expenses of living are four;  he will have a surplus of 104 dollars at the end of the year.  This would pay the interest on upwards of 1700 dollars.  His chance of living, if he is twenty-one years old, is, according to the doctrine of life-insurances, at least thirty years.  After making every allowance for contingencies, a loan of 500 dollars to such a young man, might be considered quite a prudent act, and such a loan might enable him to double his weekly revenue.  But the uncertainty of business, and the instability of moral character which is produced by uncertainty of business, are such, that capitalists deem the chances of re-payment not sufficient to justify lending to young mechanics: and the embryo Doctor Franklins who are among them, are left to contend with adversity, without assistance from their richer neighbors.

As there is no borrowing at present on personal security, except from the Banks, many persons suppose that if there were no Banks, there would be no borrowing at all.  But Banks do not increase the amount of loanable capital in the country.  The loanable capital of each year, is the wealth which its owners do not choose to employ in their own business.  All Banking can do, is, to take this loanable capital out of the hands of its owners, and place it under the control of irresponsible corporations.

If those who have honestly paid their cent per cent for Bank stock, could get their money back, and lend it on bond, it would be more secure than it is at present.  Much of that money has been lent by the Banks to wild speculators.  It would be in safer hands, if lent to industrious farmers and mechanics, and plain dealing merchants and storekeepers.  We mean, of course, if we had a sound money system, and a sound credit system built thereon, and that sound moral character which proceeds from a sound money and sound credit system.  At present, it is not prudent to lend on any security short of real estate.  Such is the precariousness of business, that men who do not like to incur debts which they may be unable to pay, are scrupulous about borrowing on bond, unless their personal estates are so large as to cover all risk.

The same subject, continued.

It is a very pernicious kind of credit which Banking substitutes for the kind of credit which would exist, if we could escape the evils of government paper money, and of unnecessary alterations in our coinage.

The lender and the borrower do not, under the present system, meet each other face to face.  The capital is placed in the hands of irresponsible Boards of Directors, who, in managing it, have regard to little but their own personal interest and that of their favorites.  Great facilities are thereby afforded to many men for borrowing, to whom no man ought to lend.  They are led by Bank loans to engage in business for which they are not fitted by either nature or education.  The enterprizes fail, and the wealth of the community is diminished in proportion as the amount of capital thus employed is great or small.

Instances have occurred of men obtaining credit for an immense amount, who were not entitled to credit for one cent.  They were neither skilful, industrious, nor economical.  They had no capital in their faculties;  and none in the form of real or personal estate;  or, if they had, it was previously loaded with debts of equal amount to its whole value.  On an investigation of the affairs of a petty Bank in Buck's county, it was found that the President was indebted to it, either individually, or as a co-partner with other men, in the sum of $112,000, which was three times the amount of the active capital of the Bank.  In the case of a Bank in Connecticut, the loans of which were 1,900,000, no less a sum than 1,500,000 was lent to two commercial firms, consisting of two persons each.  In another instance, four gentlemen of Baltimore, who had previously borrowed $1,957,700 from a certain Bank in the regular way, borrowed an additional sum of $1,500,000 from the same Bank, without even asking the consent of the proper officers.  From a statement recently published, it appears that, on the 9th of April, 1832, the whole amount of notes and bills discounted at the principal Bank in Philadelphia, was $7,939,679.52;  of which sum, more than two-thirds was loaned to ninety persons.  More than $3,000,000 were in the hands of seventeen individuals, and nearly one-seventeenth part in the hands of one person.  Deducting from the total the bills of exchange, the discounts of the Bank on that day, amounted to $5,964,085.26;  and nearly five millions and a half of this amount were distributed as follows:

In loans of not less than $20,000, each to 72 persons, $2,404,278
50,000, do. 19 do. 1,274,882
do. 100,000, do. 3 do. 341,729
do. 200,000, do. 4 do. 995,456
do. 400,000, do. 1 do. 417,766

Leaving only $529,974.26, to be divided among the rest of the community.  A small amount borrowed from a Bank, gives a man great credit with the community.  By paying down a few thousand dollars and giving mortgages for the remainder of the purchase money, he may get real estate in possession of the value of fifty thousand dollars.  He is then regarded as a rich man by the multitude, who know of his houses and lands, but know nothing of the mortgages.  They are willing to let him have any kind and any amount of goods on credit.  The second year he may be insolvent;  but his credit remains unimpaired, and he satisfies those from whom he bought goods in the first year, by the proceeds of goods purchased on credit in the second year.  Every year the amount of debt he owes beyond what he is able to pay, goes on increasing;  but ten or twelve years may elapse before his insolvency becomes apparent.  In the mean time he is living in splendor on the property of other men.

This facility of credit leads many into extravagant modes of living.  What they have obtained by the sweat of their brow, men know the value of, and are careful of.  But what they obtain in a less laborious way, they expend more freely.  The easiness with which they can run into debt, is to multitudes a great misfortune.

It is well if extravagant living is the only fault this facility of credit brings with it.  When men accustomed to splendor, have the property of others in possession, and can secure an independent fortune by so simple an act as a false oath in an insolvent's court, the temptation may prove too strong to be resisted.  When they break, the ruin that follows spreads far and wide;  for a system of guaranteeing has grown out of our present mode of doing business, through which every man's success in life is made to depend quite as much on the good conduct of those with whom he is connected, as on his own frugality and industry.  The Banks are secured by special assignments in which the endorsers of notes are made "preferred creditors," but all others with whom the bankrupt has had commercial dealings, are injured.  As every merchant depends in part on what is owing to him by others to pay his own creditors, bankruptcies seldom occur singly.  One dishonest, or one simply unfortunate man, may break twenty.

When credit has caused such a distribution of wealth as renders that capital productive which would otherwise be unproductive, and gives employment to those persons who would otherwise be idle, or less profitably employed, it effectuates all the good that it is in its nature capable of accomplishing.  Left to itself, it would regulate itself – would reach this limit, and seldom pass beyond it.  Pushed beyond this extent, it becomes pernicious;  and it is pushed far beyond this extent, by our present system.  There is now little buying or selling, except on credit.  Even the trade of consumption is on credit.  A pass book goes to the grocer's;  and the tailor and the shoemaker think themselves happy if their bills are paid at the end of the year.

The retail storekeeper (if he does not commence business without any capital of his own,) lends his capital to his customers by selling to them on credit.  This forces him to borrow another capital from the wholesale merchant: for, buying goods on credit, is the same as borrowing capital – it is borrowing in the shape of goods instead of money, and giving a note instead of a bond, and an additional price instead of interest.  The wholesale merchant, having lent his capital to the retailer, is forced to borrow another capital from the Bank.  The Bank, in its turn, borrows the capital of its depositors, and of those who receive its notes.  In this way, the whole community becomes indebted – the private families to the storekeepers, the storekeepers to the merchants, the merchants to the Banks, and the Banks to the community at large.

Nothing is gained by this forced extension of the credit system.  It does, indeed, increase the gambling trade of speculation: and that kind of trade in which sheriffs, constables, and assignees, are the active agents.  It also increases, in particular years, the trade of consumption: but then it draws from the productive capital of the country, and diminishes the trade of consumption in the following years.  The amount of bona fide trade for a series of years depends on the amount of goods produced and to be exchanged.  The aggregate of this trade would be much increased through the habits of industry and economy which a cash and sound credit system would introduce.

On a cash system, men with small capitals could do as much business as they do at present.  They would then turn their capital more frequently.  By each act of trade, they would get back their own capital.  Now, when they turn their capital once, they turn it out of their own hands, and it remains out of their hands for a year or eighteen months.  In the interim they must employ themselves in turning other people's capital, or give up business.

If an account should be rendered of the amount lost by bad debts in the course of a year, some notion might be formed of one of the evils of super-extended credit: for, nine bad debts in ten may fairly be laid to the account of this system.  The aggregate must be enormous, as from 600 to 800 persons annually take the benefit of the insolvent laws in Philadelphia alone, and numerous compromises are made of which the the courts take no cognizance.