AN INQUIRY
INTO THE PRINCIPLES
of the
AMERICAN BANKING SYSTEM.
by
William Gouge


CHAPTER I.
Importance of the Subject.


In an address to the stockholders of the United States Bank, at their meeting in 1828, Mr. Nich. Biddle, the President of that institution, stated, that, of five hundred and forty-four Banks in the United States, one hundred and forty-four had been openly declared bankrupt, and about fifty more had suspended business.

Mr. Gallatin, in his "Considerations on the Currency and Banking System," published in 1831, gives a list of 329 State Banks then in operation, having nominal capitals of the amount of $108,301,898, which, added to the capital of the United States Bank, made the whole nominal capital of these institutions, upwards of one hundred and forty-three millions of dollars.

These Banks issue notes which serve as substitutes for coin.
They grant credits on their books, and transfer the amount of credit from one merchant to another.
They receive money on deposit.
They buy and sell bills of exchange.
They discount mercantile notes.
They buy and sell public stocks.

All these are important functions, and if only one of them be ill performed, the community must suffer inconvenience.

The Banks are scattered through nearly all the States and Territories which compose our Union;  but they may all be embraced in one view, inasmuch as they all substitute paper for specie, and credit for cash, and are all endowed with privileges which individuals do not possess.

By their various operations, immediate and remote, they must affect, for good or for evil, every individual in the country.  Banking is not a local, temporary, or occasional cause.  It is general and permanent.  Like the atmosphere, it presses every where.  Its effects are felt alike in the palace and the hovel.

To the customs of trade which Banking introduces, all are obliged to conform.  A man may, indeed, neither borrow money from the Banks, nor deposit money in their vaults: but if he buys or sells it is with the medium which they furnish, and in all his contracts he must have reference to the standard of value which they establish.  There is no legal disability to carrying on commerce in the old fashioned safe way: but the customs of Banking have introduced a practical disability.  It is no longer possible for the merchant to buy and sell for ready money only, or for real money.  He must give and take credit, and give and take paper money, or give up business.

Bank paper is not a legal tender in the discharge of private debts: but it has become, in point of fact, the only actual tender, and the sudden refusal of creditors to receive it would put it out of the power of debtors to comply with their engagements.

Credit, the great rival of cash, is completely controlled by the Banks, and distributed by them as suits their discretion.

These institutions may contribute little to the production of wealth; but they furnish the means to many for the acquisition of wealth; they appear to be the chief regulating cause of the present distribution of wealth, and as such are entitled to particular attention.

"In copying her [England]" says Mr. Jefferson "we do not seem to consider that like premises induce like consequences.  The Bank mania is one of the most threatening of these imitations: it is raising up a monied aristocracy in our country which has already set the Government at defiance, and although forced to yield a little on the first essay of their strength, their principles are unyielded and unyielding.  They have taken deep root in the hearts of that class from which our legislators are drawn, and the sop to Cerberus, from fable has become history.  Their principles take hold of the good, their pelf of the bad, and thus, those whom the Constitution has placed as guards to its portals, are sophisticated or suborned from their duties.  That paper money has some advantages must be admitted: but its abuses are also inveterate; and that it, by breaking up the measure of value, makes a lottery of all private property, cannot be denied.  Shall we ever be able to put a constitutional veto upon it ?"1

"In most disquisitions upon the noxious tendency of Banks," says another writer2 "much stress has been laid upon the injuries they have a power to inflict, by excessive loans and consequent bankruptcy, and by creating and circulating a permanent excess of currency.  Could these two evils be avoided, many believe that Banks would be innoxious.  I regret to differ.  I am not of those who imagine that Banks incorporated with a liberal capital, will ever endanger their solvency by extending their loans;  nor of those who believe that Banks controlled by specie payment, can circulate a permanent excess of paper.  And yet, I think I can perceive a portentous power that they exercise over commercial enterprize.  I am of opinion that they can circulate a temporary excess of paper, which, from time to time, finds a corrective, in a run upon the Banks for specie;  that this temporary excess is succeeded by a temporary deficiency, one extreme invariably tending to another; that the consequences of this alternate excess and deficiency are, in the former case to impart an undue excitement, and in the latter an undue depression to commercial enterprize;  that the effect of the former is to create an unnatural facility in procuring money, and to enhance unnaturally the price of commodities;  while that of the latter is to produce an artificial scarcity, and to cheapen prices artificially;  that the victims of these vibrations are the great body of merchants, whose capital and average deposits cannot always command discounts;  that the gainers are a few intelligent and shrewd capitalists, the magnitude of whose deposits commands enormous discounts at all times, and who, being behind the curtain, know when to buy and when to sell.  I am of opinion that these vibrations inflict evils which close not with mercantile speculation;  that they tend to unhinge and disorder the regular routine of commerce, and introduce at one moment a spirit of wild and daring speculation, and at another, a prostration of confidence, and stagnation of business: that these feelings are transferred from the counting-house to the fire-side;  that the visionary profits of one day stimulate extravagance, and the positive losses of another engender spleen, irritation, restlessness, a spirit of gambling and domestic inquietude.

"I appeal to the commercial history of our country, during the last seven years, and to the aching hearts of many of my fellow-citizens, for the truth of these reflections.

"I wish not to be misunderstood.  Let no one suppose me so weak as to attribute every unfortunate speculation, and every fluctuation in prices, to an undue management or organization of our Banking Institutions.  That would be a folly, from the imputation of which I trust the preceding remarks will rescue me.  There are commercial fluctuations, and they are wholesome.  They invigorate enterprize, and their benefits are directly felt by all.  There are Banking fluctuations, and they are highly deleterious.  They intoxicate enterprize, only to enfeeble it;  and the benefits are restricted to a few.

"This evil of Banking fluctuation, ends not with the mercantile community.  It extends to every thing that commercial enterprize reaches.  It injures the farmer and the mechanic, in the precise ratio of the vacillations of public feeling.

"The injuries which it has inflicted have been as universal as the insinuation of bank paper;  and the peculiar manner of its operation renders it doubly distressing.  It does not affect the wealthy man, because he can always control discounts;  but it falls with single and dreadful severity upon the industrious poor man, whose capital is not sufficient to command permanent accommodations;  upon the inexperienced, who purchase knowledge by a sacrifice of property, and upon the merchant whose skill and sagacity Are superior to his wealth.

"Against a power so tremendous, what barrier has been erected ? Against a power which, at different periods, has baffled the legislative wisdom of our revolutionary sages, of the Governments of Europe, and of Great Britain, what check have we imposed ? The interest account of each bank.  As well might Canute have controlled the waves of the ocean with a breath."

"Of all aristocracies," said a Committee of the New York Legislature, in 1818, "none more completely enslave a people than that of money;  and in the opinion of your committee, no system was ever better devised so perfectly to enslave a community, as that of the present mode of conducting Banking establishments.  Like the Syren of the fable, they entice to destroy.  They hold the purse strings of society;  and by monopolizing the whole of the circulating medium of the country, they form a precarious standard, by which all property in the country, houses, lands, debts and credits, personal and real estate of all descriptions, are valued;  thus rendering the whole community dependent on them; proscribing every man who dares to expose their unlawful practices: if he happens to be out of their reach, so as to require no favors from them, his friends are made the victims.  So no one dares complain.

"The committee, on taking a general view of our State, and comparing those parts where Banks have been for some time established, with those that have had none, are astonished at the alarming disparity.  They see, in the one case, the desolations they have made in societies that were be fore prosperous and happy; the ruin they have brought on an immense number of the most wealthy farmers, and they and their families suddenly hurled from wealth and independence into the abyss of ruin and despair.

"If the facts stated in the foregoing be true, and your committee have no doubt they are, together with others equally reprehensible and to be dreaded, such as that their influence too frequently, nay, often already begins to assume a species of dictation altogether alarming, and unless some judicious remedy is provided by legislative wisdom, we shall soon witness attempts to control all selections to offices in our counties, nay the elections to the very Legislature.  Senators and members of Assembly will be indebted to the Banks for their seats in this Capitol, and thus the wise end of our civil institutions will be prostrated in the dust of corporations of their own raising."

Not a few of those who have a personal interest in the continuance of the system, acknowledge and deplore the evils it produces.  Indeed we have found no men more sensible of those evils, than some of the officers of Banks.  They retain their offices on the same principle that they would, if they lived in England, retain offices under a Government they could not approve.  To the established system of a country, whether political or commercial, men may deem it expedient, perhaps believe it necessary, to conform;  but this need not prevent their discovering the necessity for reformation.

One of these gentlemen, Mr. John White, the Cashier of the United States Branch Bank at Baltimore, makes the following candid and correct statement, in a letter to the late Secretary of the Treasury, under date of February 15th, 1830:

"Looking back to the peace, a short period, fresh in the memory of every man, the wretched state of the currency for the two succeeding years, cannot be overlooked;  the disasters of 1819, which seriously affected the circumstances, property, and industry of every district in the United States, will long be recollected.  A sudden and pressing scarcity of money prevailed in the Spring of 1822;  numerous and very extensive failures took place at New York, Savannah, Charleston, and New Orleans, in 1825;  there was a great convulsion among Banks and other monied institutions in the State of New York in 1826;  the scarcity of money among traders in that State, and eastward, in the Winter of 1827 and 1828, was distressing and alarming;  failures of Banks in Rhode Island and North Carolina, and amongst the manufacturers of New England and this State, characterize the last year;  and intelligence is just received of the refusal of some of the principal Banks of Georgia to redeem their notes with specie – a lamentable and rapid succession of evil and untoward events, prejudicial to the progress of productive industry, and causing a baleful extension of embarrassment, insolvency, litigation, and dishonesty, alike subversive of social happiness and morals.  Every intelligent mind must express regret and astonishment, at the recurrence of these disasters in tranquil times and bountiful seasons, amongst an enlightened, industrious, and enterprizing people, comparatively free from taxation, unrestrained in our pursuits, possessing abundance of fertile lands, and valuable minerals, with capital and capacity to improve, and an ardent disposition to avail ourselves of these great bounties.

"Calamities of an injurious and demoralizing nature, occurring with singular frequency, amidst a profusion of the elements of wealth, are well calculated to inspire and enforce the conviction that there is something radically erroneous in our monetary system, were it not that the judgment hesitates to yield assent, when grave, enlightened, and patriotic Senators, have deliberately announced to the public, in a recent report, that our system of money is in the main excellent, and that in most of its great principles, no innovation can be made with advantage."

The "grave, enlightened, and patriotic Senators," to whom Mr. White alludes, are those who, with Mr. Smith, of Maryland, at their head, made a report, in the year 1830, in which they represented certain kinds of Bank paper as being as good as gold, and even better.  If their opinion is correct, it ought to be confirmed.  If it is not correct, its erroneousness ought to be exposed;  for error in such a subject as this, may be productive of incalculable mischief.



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1   Thomas Jefferson, letter to Dr. Josephus B. Stuart, Monticello, May 10, 1817.

2   Letter to Mr. Gallatin, by Publicola, New York, 1815.