William Gouge
An Inquiry

Of Banks as Corporations.

Against corporations of every kind, the objection may be brought, that whatever power is given to them, is so much taken from either the Government or the people.

As the object of charters is to give to members of companies powers which they would not possess in their individual capacity, the very existence of monied corporations is incompatible with equality of rights.

Corporations are unfavorable to the progress of national wealth.  As the Argus eyes of private interest do not watch over their concerns, their affairs are much more carelessly and much more expensively conducted than those of individuals.  What would be the condition of the merchant who should trust every thing to his clerks, or of the farmer who should trust every thing to his laborers ?  Corporations are obliged to trust every thing to stipendiaries, who are oftentimes less trustworthy than the clerks of the merchant or the laborers of the farmer.

Such are the inherent defects of corporations, that they never can succeed, except when the laws or circumstances give them a monopoly, or advantages partaking of the nature of a monopoly.  Sometimes they are protected by direct inhibitions to individuals to engage in the same business.  Sometimes they are protected by an exemption from liabilities to which individuals are subjected.  Some times the extent of their capital or of their credit, gives them a control of the market.  They cannot, even then, work as cheap as the individual trader, but they can afford to throw away enough money in the contest, to ruin the in dividual trader, and then they have the market to themselves.

If a poor man suffers aggression from a rich man, the disproportion of power is such, that it may be difficult for him to obtain redress;  but if a man is aggrieved by a corporation, he may have all its stockholders, all its clerks, and all its protegés for parties against him.  Corporations are so powerful, as frequently to bid defiance to Government.

If a man is unjust, or an extortioner, society is, sooner or later, relieved from the burden, by his death.  But corporations never die.

What is worst of all, (if worse than what has already been stated be possible,) is that want of moral feeling and responsibility which characterizes corporations.  A celebrated English writer expressed the truth, with some roughness, but with great force, when he declared that "corporations have neither bodies to be kicked, nor souls to be damned."

All these objections apply to our American Banks.

They are protected, in most of the States, by direct inhibitions on individuals engaging in the same business.

They are exempted from liabilities to which individuals are subjected.  If a poor man cannot pay his debts, his bed is, in some of the States, taken from under him.  If that will not satisfy his creditors, his body is imprisoned.  The shareholders in a Bank are entitled to all the gain they can make by Banking operations;  but if the undertaking chances to be unsuccessful, the loss falls on those who have trusted them.  They are responsible only for the amount of stock they may have subscribed.

For the old standard of value, they substitute the new standard of Bank credit.  Would Government be willing to trust to corporations the fixing of our standards and measures of length, weight, and capacity ?  Or are our standards and measures of value of less importance than our standards and measures of other things ?

They coin money out of paper.  What has always been considered one of the most important prerogatives of Government, has been surrendered to the Banks.

In addition to their own funds, they have the whole of the spare cash of the community to work upon.

The credit of every business man depends on their nod.  They have it in their power to ruin any merchant to whom they may become inimical.

We have laws against usury: but if it was the intention of the Legislature to encourage usurious dealings, what more efficient means could be devised than that of establishing incorporated paper money Banks ?

Government extends the credit of these institutions, by receiving their paper as an equivalent for specie, and exerts its whole power to protect and cherish them.  Whoever infringes any of the chartered privileges of the Banks, is visited with the severest penalties.

Supposing Banking to be a thing good in itself, why should Bankers be exempted from liabilities to which farmers, manufacturers, and merchants are subjected ?  It will not surely be contended that Banking is more conducive than agriculture, manufactures, and commerce, to the progress of national wealth.

Supposing the subscribers to Banks to be substantial capitalists, why should artificial power be conferred on them by granting them a charter ?  Does not wealth of itself confer sufficient advantages on the rich man ? Why should the competition among capitalists be diminished, by forming them into companies, and uniting their wealth in one mass.

Supposing the subscribers to Banks to be speculators without capital – what is there so praiseworthy in their design of growing rich without labor, that Government should exert all its powers to favor the undertaking ?

Why should corporations have greater privileges than simple co-partnerships ?

On what principle is it, that, in a professedly republican Government, immunities are conferred on individuals in a collective capacity, that are refused to individuals in their separate capacity ?

To test this question fairly, let us suppose that a proposition were made to confer on fourteen individuals in Philadelphia, and three or four hundred individuals in other parts of the country, the exclusive privileges which three or four hundred incorporated Banks now possess.  How many citizens would be found who would not regard such a proposition with horror.  Yet privileges conferred on corporations are more pernicious, because there is less moral feeling in the management of their concerns.  As directors of a company men will sanction actions of which they would scorn to be guilty in their private capacity.  A crime which would press heavily on the conscience of one man, becomes quite endurable when divided among many.

We take much pride to ourselves for having abolished entails, and justly, in so far as the principle is concerned: but it seems to be lost sight of by many that entails can prove effective only when the land is of limited extent, as in Great Britain;  or where the mass of the population are serfs, as in Russia.  In those districts of our country where negro slavery prevails, entails, aided by laws of primogeniture, would have kept estates in a few hands: but in the Middle and Northern States, a hundred ways would have been contrived for breaking the succession.  If direct attempts had proved unsuccessful, the land would have been let on leases of 99 or 999 years, which would have been nearly the same in effect as disposing of them in fee simple.  The abundance of land prevents its being monopolized.  Supposing the whole extent of country, from the Atlantic to the Pacific, and north of the 39th degree of latitude, parcelled out among a few great Feudatories;  those Feudatories, in order to derive a revenue from their domains, would be forced to lease them in a manner which would give the tenants the whole usufruct of the terrene;  for, the quit rent would be only an annual payment, in stead of a payment of the whole in advance.

But the floating capital of the country is limited in amount.  This, from the condition of things, may be monopolized.  A small portion of the community have already, through the agency of Banking operations, got possession of a great part of this floating capital, and are now in a fair way of getting possession of much of the remainder.  Fixed and floating capital must be united to produce income, but he who has certain possession of one of these elements of revenue, will not long remain without the other.

The difference between England and the United States, is simply this: in the former country, exclusive privileges are conferred on individuals who are called Lords;  in the latter, exclusive privileges are conferred on corporations which are called Banks.  The effect on the people of both countries is the same.  In both the many live and labor for the benefit of the few.

Of the Popular Arguments in favor of Banking.

The objections to the American Banks are tripartite.  They are, first, such as arise from their substituting paper money for metallic.  Secondly, such as arise from their introducing an unsound system of credit.  And, thirdly, such as arise from their nature as corporations.  If the reader will take a view of all the different operations of the Banks, connecting them together in his mind as they are connected in fact, he will require no refutation of the popular arguments in favor of the system.  Nevertheless, it may not be amiss, for the satisfaction of some, to consider these arguments in the form in which they are commonly presented.

"Banks make money plenty."

Nay, they make real money scarce.  As Bank notes are circulated, gold and silver are driven away.  It is contrary to the laws of nature that two bodies should fill the same space at the same time: and no fact is better established than that, where there are two kinds of currency authorized by law or sanctioned by custom, that which has the least value, will displace the other.  If Banks at any time make money more plentiful than it would be if only gold and silver circulated, they diminish its value in increasing its quantity.  The valuation, or relative estimation of things is thereby enhanced, but not an atom is added to the wealth of the community.

"Banks diminish the rate of interest."

So far is this from being true, that the Banks tend to increase the rate of interest, by collecting capital into large masses, and diminishing the competition among money lenders.  They, also, by their various operations, immediate and remote, give rise to a multitude of usurious transactions.

"Banks do much good by lending money to individuals."

But much less good than would be done, by the owners of this money lending it themselves.  Banks, as was observed in a previous chapter, do not increase the loanable capital of the country, but only take it out of the hands of its proprietors, and place it under the control of irresponsible Bank Directors.

"If there were no Bank paper, specie must of necessity be frequently transported to and from distant parts of the country, at great expense and great risk."

The trade between different parts of the country does not consist of an interchange of Bank notes or of specie, but of the products of the soil and the industry of the inhabitants.  By private bills of exchange, the sums due to one trader could be transferred to another;  and it would be necessary only occasionally to discharge balances in specie.  This is, in fact, the present custom of trade, Bank notes being to only a limited extent, substitutes for bills of exchange.

"Banks diminish the rate of exchange between different parts of the country."

Then they do great evil.  The rate of exchange is the natural balance wheel of trade between different parts of the country.  Banks cannot interfere with this, without doing harm.  When they lessen the rate of exchange, they remove a natural check on overtrading.

"Banks give greater security than individuals in buying and selling exchange."

If so, it is because the other operations of Banking have rendered all kinds of business uncertain.  In countries where paper money is unknown, no more risk attends dealings in exchange than other kinds of dealings.

"Such are the customs of trade in the United States, that Banking seems necessary."

But the customs herein referred to have their origin in Banking, and, as they are pernicious, ought to be abolished.

"All commercial countries have some systems of Banking."

And none have a worse system than the United States.  In all commercial countries, there are men who receive money on deposit, lend money, and deal in exchanges;  but the system of Banking on paper money, is of modern origin.  The cities of Greece, and Rome, and Egypt, and ancient Asia, attained to wealth far greater than we can boast of, without the aid of chartered Banks.  In all countries in which paper money Banking, or paper money of any kind, has been introduced, it has done much evil.  Austria, Russia, Sweden, France, Denmark, Portugal, Brazil, and Buenos Ayres, all bear witness to this truth, as well as England and the United States.  To these countries we may add China, in which paper money was tried before the commencement of our era, and, on experience of its ill effects, abandoned.

"The various evils that are mentioned as flowing from Banking, proceed, in fact, from abuses of it.  Banking on proper principles is productive of great benefits."

We willingly admit that Banking on proper principles would be productive of great benefits: but we deny that Banking with paper money, or by corporations possessing peculiar privileges, is Banking on proper principles.

"Paper is more convenient than specie in large payments."

Deduct from the total of large payments, all those that are made on account of accommodations at Bank, and all those made on account of the wild speculations introduced by Banking, and it will be found that so few large payments would remain to be made, that we should be able to get through them all without difficulty.  To count out a sum in ten or twenty dollar gold pieces, would be as easy as to count it out in ten or twenty dollar Bank notes.  Before the establishment of a Bank in Montreal, guineas were done up in rouleaus, and such was the confidence the merchants had in one another, that the paper envelopes of the guineas were seldom broken.  We mention this merely to show that the effecting of large payments with metallic money, would not be a work of so much difficulty as some imagine.  In cases where great despatch was required, the silver or gold money might be weighed, as was done by the Bank of England in 1825, when the demands for gold was so urgent, that the tellers had not time to count the sovereigns they paid out.

If we wish to effect large payments with the least possible inconvenience, we must establish a single Office of Deposit and Transfer in each large town.  This would save the time which is now lost in running from Bank to Bank.

"Paper saves the wear and tear of coin."

The saving is too insignificant to be taken into a national account, in a subject of so much importance as the soundness of the currency.  Mr. Gallatin says that "the annual amount wanted to repair the loss occasioned by friction in gold and silver coin, cannot exceed, taking the highest computation, seventy thousand dollars a year in a coinage of forty millions, and is probably much less."  This estimate has been formed by Mr. Gallatin, "from various opinions deduced from actual experiments."

Dr. Moore, the Director of the United States Mint, in a report made to the President in 1826, computes the loss on gold coins at two per cent. in fifty years, and on silver coins at only one per cent.

Agreeably to the report made to the Senate by the Committee of which Mr. Sanford was chairman, half-dollars and half-eagles will circulate for one hundred years, and dollars and eagles for two hundred years, without being so much worn or defaced as not to serve the purposes of a circulating medium.

"Banks afford the public a safe place for depositing their funds."

Not always.  One hundred and sixty of these safe depositories, have broken in the last twenty years, and one hundred and sixty more may break in the twenty years next to come.

Again: all those who deposited money in the Banks in the early part of 1814, received back their deposits in money of inferior value.  What has happened once, may happen again.

The probability is, that ten times as much has been lost by depositing money in Banks, as would have been lost if people had kept their money in their own houses.

"Every man ought to be allowed to use his own credit."

Exactly so: and, therefore, we ought not to have incorporated Banks, which give credit to some, by taking it from others.  These institutions owe their credit to acts of Assembly.  If their charters were taken from them, not even their own stockholders would trust them.  Every man ought to be allowed to use his own credit;  but he ought to get that credit fairly, and use it properly.

"If there were no Banks, it would be easy to borrow money on bond or mortgage, for long periods, but it would not be possible to obtain discount of merchants' business paper, which has but a few months to run."

Not so:  If the corporate Banks of Philadelphia were abolished, many private Banks would spring up in their place.  The owners of these private Banks would be men in whom the public could place confidence, for they would be responsible in the whole amount of their estates.  They would be men of great wealth, for it is in lending money that men of large fortunes can employ their capitals with most profit and convenience.  The competition among them would be such, that business notes would be discounted on more favorable terms than at present.  They would allow interest on such sums as their customers might leave in their hands.  For their own convenience, they would establish a public Office of Transfer and Deposit, and pay the greater part of the expenses of this institution.

The system of private Banking in England, has done much evil, (though much less evil than the system of corporate Banking in the United States,) because the private Banks of England have traded partly on paper money issued by themselves, and partly on that issued by the Bank of England.

In Scotland, where the regulating power is in the unincorporated Banks, the system does less evil than in England, although paper money is used in both countries.

Private Banking in Switzerland, Holland, France, Hamburg, and Bremen, does much good and no evil.  Such a system will we have in the United States, when paper money shall be abolished.  In every town in the United States, in which there is trade enough to require it, private Bankers will spring up, who will receive money on deposit, and pay interest for the use of it:  Lend money on interest:  Buy and sell bills of exchange:  Attend to the collection of debts, and in various ways facilitate business.  Operating on sufficient capital, these private Bankers will not ruin their customers by violent "contractions."  Neither will they incite them to engage in improper enterprizes, by sudden and great "expansions."

Our corporate Banks do no good to compensate for the evils they occasion, by their continual alterations of the measures of value, by the uncertainty they give to trade, and by the advantages they confer on some men over others.  With private Banks, and public Offices of Transfer and Deposit, we should have all that is good in the present system, without the evil.