William Gouge
An Inquiry

Of Restrictions on Banking Corporations.

The evils which are produced by paper money Banking, are so great as necessarily to force themselves on the attention of those who are most deeply interested in the continuance of the system.  To remedy these evils, they propose various restrictions on Banking corporations, or new modes of conducting their business.

A common opinion is, that, if the Banks would not discount accommodation notes, and if they would confine themselves to business paper of short dates, their operations would not be injurious to the community.*  But, a little reflection may convince us, that, by discounting business paper, as much Bank paper might be set afloat, as by discounting accommodation notes.  The same lot of goods might be sold to a dozen persons, and each might give a note, and each of these twelve notes might be discounted at Bank.  The limit on Bank issues would be the same as at present – that is, the demand for specie for foreign trade.  The anxiety of the Banks to extend their issues would be in no way diminished.  The inducement, then, would be to buy and sell goods that notes might be discounted at Bank.  Now, it is to have notes discounted at Bank, that goods may be bought and sold.  The spirit of speculation being excited by any cause, notes would flow in for discount, and the Banks would, as at present, discount as many as they might deem prudent.

The severest legislative enactments could not confine the Banks to discounting business paper of short dates, if this paper did not afford full employment to all their "capital" and all their "credit."  They would soon find sufficient reasons for "renewing" the business notes of some of their customers, and those notes, thus renewed, would become accommodation notes.

Except in the cases of applications from Directors, and their favorites, the Banks now prefer business notes, because these place their issues more immediately under their control.  More than a certain amount they cannot lend on accommodation paper, for they must keep so much capital under command as is necessary to support their credit.  Their deposits would otherwise be withdrawn, and the circulatian of their notes would cease.  It does not appear that these accommodation notes have any specially mischievous effect on prices.  They are permanent in amount, or nearly so.  The fluctuation of prices appears to be occasioned by that part of Bank "capital" and of Bank "credit," which is always varying in amount.

Limiting the amount of issues to double the amount of capital, and the amount of loans to thrice the amount of capital, is a favorite provision with legislators.  But, Mr. Gallatin says, "amongst more than three hundred Banks, either now existing, or which have failed, and of which we have returns, we have not found a single one, the loans of which amounted, so long as specie payments were in force, to three times, or the issues to twice, the amount of capital.  It is clear, that provisions applicable to such improbable contingences, are purely nominal."

Compelling the Banks to give an annual statement of their affairs, is also a favorite measure.  But it is not easy to compel them to give a faithful statement.  The accounts of the Banks that break look nearly as well on paper as the accounts of the Banks that continue payments.  They who are acquainted with the secrets of Bank management, say, little reliance is to be placed on these accounts.

Preventing the Banks from issuing notes of a less denomination than five dollar's, is a measure which is effective so far as it goes.  But it still leaves the Banks the power to substitute paper for specie, and to carry on credit dealings to an extent which is very pernicious.  In England, where the issue of notes of a less denomination than one pound sterling, or about four dollars and eighty cents, has, for many years, been prohibited, the contractions and expansions of the Bank have done so much evil, that it has been found necessary to prohibit the emission of any notes of a less denomination than five pounds sterling, or about twenty-four dollars Federal currency.  The Bank of France issues no notes of a less denomination than 500 francs, equal to about ninety-four dollars of our money, yet the Bank of France is at times forced to make such sudden and great curtailments, as inflict much evil on many of those who are within the sphere of its influence.  The manufacturers in Alsace had doleful experience of this power of the Bank in France, in 1825.  The merchants of Paris, and throughout the kingdom, felt it in 1819.  In 1822, also, the contractions which the Bank of France found it necessary to make, produced much commercial embarrassment in many parts of that country.

In the charter of the Bank of France, there is a provision that all profits above six per cent. shall be converted into a reserved stock, on which reserved stock the Bank may make dividends not exceeding five per cent.  Such a provision in the American Bank charters, would remove many inducements to over-banking, and would make speculations in their stock less frequent.

In proportion as the personal responsibility of those concerned in Banking is increased, and in proportion as the denomination of the notes they are permitted to issue, is raised in amount, the system becomes less pernicious.  But no legislative enactments can afford an adequate remedy for the evils which flow from incorporated paper money Banks.  The system is, to use the language of the lawyers, malum per se – or a thing which is evil in its nature.  The very principle of its foundation is wrong.  No immunities should, in a Republican Government, be granted to any, save those which are common to all.  To impart to corporations a moral sense of right and wrong, is impossible.  They may be made nominally responsible, but to impose on them an effective responsibility is impracticable.  To a certain extent they obey the laws, and respect public opinion, but it is only so far as, and so long as, is necessary for making their business profitable.  The interest account of the Banks is, in point of fact, the only effective check we have on the abuse of those powers which our legislative bodies have conferred on them by charter.

Such privileges as the Banks possess, ought neither to be sold nor to be given away, by a republican legislature, to any men or any body of men.  A control over the whole of the cash and the credit of the community, is a power as despotic in its nature as any possessed by the nobility of Germany.

The regulation of the currency is one of the most important prerogatives of sovereignty.  This prerogative is now, in point of fact, surrendered to the Banks.  They drive away what may be called the natural money of the country, and substitute for it something which differs from this natural money in both the nature of its value, and the causes of its value.  A quantity of this money may be put afloat, but, whatever may be the discretion of Directors of Banks, and whatever may be the legal restrictions on corporations, it must fluctuate in quantity, and be affected in value, by all the causes, natural and political, by which credit is affected.  It is flexible, vacillating, agitated by every wind that blows.  If any man can invent a method by which the hardness and other properties of platina can be imparted to lead, that man may hope to discover the means by which Bank credit may be made as stable as gold and silver medium.

To prove that the task is hopeless, we shall give an analysis of the standard and measures of value introduced by Banking.


* This opinion was sufficiently refuted by the Bullion Committee, so long ago as 1811;  and the correctness of their conclusion is confirmed by those who have had the best opportunities for observing the operations of the Banking system.  "I consider the opinion entertained by some," says Sir F.B., "that the Bank ought to regulate its issues by the public demand, as dangerous in the extreme;  because I know by experience, that the demand for speculation can only be limited by want of means."  The general practice in England is to discount only business paper, but this does not prevent the recurrence of evils similar to those we suffer in the United States.

Of the Essential qualities of Bank Notes.

Bank notes are considered by some as "representatives of specie."  But, for every silver dollar they have in their vaults, some of the Banks have two paper dollars in circulation, some three, some five, some eight, and some thirteen.  Bank notes cannot represent that which the Banks have not, and which is not in the country.  If Bank notes can, in any sense, be considered representatives of specie, the paper dollar of the same Bank sometimes represents fifty cents, and sometimes forty cents: and the paper dollars of different Banks represent at the same time, thirty three and a third cents, twelve and a half cents, ten cents, and seven cents of the silver dollar.  Yet they are all current, and all have the same effective power as silver in exchanges.

Various other erroneous views are entertained of the nature of Bank notes, the consideration of which would be tedious.  Examining them one by one, would be merely showing what Bank notes are not.  Instead of doing this, it will, it is presumed, be sufficient to show what Bank notes really are.

Bank notes are simple evidences of debt due by the Banks.  This is their true character.

As mere evidences of debt, they differ not from the promissory notes of merchants.  They are also, in common with bills of exchange and business notes, a commercial medium;  but in some respects, there is an essential difference between Bank notes and the notes of merchants.[3]

For their promissory notes, the merchants pay interest.  For the promissory notes of the Banks, the Banks receive interest.

The promises to pay of the merchants are fulfilled, when the notes arrive at maturity.  Bank notes are never paid.[4]  Payment of them in the aggregate is never demanded, because what could be got in payment, would, for most purposes of domestic trade, serve no better purpose than Bank notes themselves.

Bank notes are thus a kind of paper money.  In the countries where they are used, bills of exchange, the pro missory notes of merchants, and balances of running accounts, are paid in Bank notes, as they are paid in other countries with metallic money.

The sales for prompt payment in Bank notes regulate sales for deferred payment in Bank notes, as, in solid money countries, cash transactions regulate credit transactions.

Like real money, Bank notes are instruments of valuation.  The quantities they express are the exponents of the effective power in exchanges of land, labor, and commodities.

An increase or decrease of Bank notes in the United States, has the same effect on prices, that an increase of solid money has on prices in Spain or Switzerland.

Increase the amount of Bank notes, and, other things being the same, prices will rise.

Diminish the amount of Bank notes, and, other things being the same, prices will fall.

In our first chapter, the several qualities of gold and silver were enumerated, all which qualities an article must possess in the same degree, to serve as well as the precious metals the purposes of money.  In proportion as the qualities of articles recede from those of gold and silver, they are unfitted for these uses.  By a comparison of the different qualities of Bank notes and coin, the reader may acquire a clear conception of the difference between real money and fictitious.

In susceptibility of receiving an impression, and in comprising a great value (i.e. market value) in a small space, Bank notes agree with coin.  But in every thing else they disagree.  Of utility in the arts, the very attribute that gives gold and silver their value in commerce, Bank notes are utterly destitute.  They are also destitute of the important qualities of unchangeableness of value, and of uniformity of value.

We, however, because we have never changed our money of account, fancy that we have never changed our standard of value.  We call a Bank dollar by the same name as a silver dollar, and then fancy there is no essential difference between them.

In our mensuration of other things which admit of increase or decrease by homogeneous degrees, we use in struments possessing the same physical properties as the thing to be measured.  The judgment the mind forms of weight or length, is regulated by a material standard.  The judgment the mind forms of value, is regulated by an ideal standard;  for Bank credit is something altogether intangible.

In solid money countries, in all sales of goods for cash, the products of labor are exchanged for the products of labor.  The product of the miner's labor, is made the instrument for circulating the products of the farmer's and of the manufacturer's labor.  The transactions are removed but one step from simple barter, and do not differ from it in its essential principle.  The exchanges on both sides are of articles possessing inherent value – articles in the production of which labor has been bestowed, and articles which possess the physical qualities which adapt them to the satisfaction of human wants and desires.  We receive commodities from one another, and give in return some uncertain representatives of credit, and fancy that trade is conducted with us on the same principles as it is in those countries where paper money is unknown.  We pass from hand to hand certain promises to pay, and call that making payment.

The relations in the supply and demand of the precious metals are so slow in changing, that hardly any perceptible variation in the value of silver has, according to some able authors, taken place in the last two centuries.  But the supply of Bank notes may vary several per cent. in different periods of the same year, and twenty or thirty per cent. in three or four years.  Thence come great rises and falls of price: but we have only an imperfect apprehension of the cause, for our intangible standard of value never changes its name, how great soever may be the extent in which it is contracted or expanded.

It is folly to say that the money of the country is not paper money.  In Virginia, Pennsylvania, and Maryland, payments of a less amount than five dollars are made in real money: but in the other States, dollar notes circulate, so that payments in specie are made for only fractional parts of the dollar.  In North Carolina, South Carolina, and some other parts of the Union, notes for 25 cents, 12½ cents, and even 6¼ cents, are current.  There even small silver change is a rarity.[5]

Of large payments, nine hundred and ninety-nine in a thousand are made with paper.  Of small payments, ninety-nine in a hundred.  The currency of the country is, we repeat it, essentially a paper currency.  The sprinkling of silver has only the effect of keeping up the reputation of the paper.  This paper varies in amount, from day to day, from month to month, and from year to year.  Every thing that affects the spirit of enterprize, affects com mercial credit, and through that, Bank credit.

The importance of adjusting measures of value with the greatest exactness, is enforced by all who have written on the subject.  An order has recently been issued to re-coin the whole of the silver money of France, amounting to not less than eighty millions of dollars, on account of its having been discovered that the mode of assay by cupellation, indicates but 1000 grains of pure silver in a mass containing 1004 grains.  The difference between the legal and the practical standard, is less than a half of one per cent.;  yet this difference has been deemed important enough to make necessary a re-coinage of the whole of the silver money of the country.  Our own statesmen bear a silent testimony to the truth of this doctrine, by their attempts to determine the ratio of gold and silver, carrying out their calculations in some tables to the five hundredth thousandth part of a grain.

Such is the care that Governments (our own among others) take in fixing metallic standards and measures of value.  If by any accident a dollar coined at our mint should contain but 369 grains of pure silver instead of 371¼, it would not be put in circulation.  The nicest chemical and mechanical operations are resorted to that the different pieces may have an exact uniformity.  But, having done this, our next care is to drive metallic measures of value from the country, and substitute those of the most uncertain nature possible.


3   "A bill of exchange drawn by an individual or individuals who do not issue notes having the character of currency, appears to us to be clearly distinguished from a Bank note, though it is a substitute, and lessens the amount of currency which would otherwise be required.  A payment made in Bank notes is a discharge of the debt, the creditor having no further recourse against the person from whom he has received it, unless the Bank had previously failed.  The bill of exchange does not discharge the debt, the person who receives it having recourse against the drawer and every preceding endorser, in case the drawer should fail or refuse to pay.  But the essential distinction is, that bills of exchange are only promises to pay in currency: and that the failures of the drawers, drawees, and endorsers, does not in the smallest degree, affect the value of the currency itself;  or impair that permanent standard of value by which the performance of all contracts is regulated." –Gallatin.

4   "The essential difference between Banking and other commercial business is that merchants rely for the fulfilment of their engagements on their resources, and not on the forbearance of their creditors, whilst the Banks always rely, not only on their resources, but also on the probability that their creditors will not require payment of their demands." –Gallatin.

5   It is observed by Mr. White, Cashier of the United States Branch Bank at Baltimore, in a letter to the Secretary of the Treasury, under date of February 30th, 1830:  "Congress fixed the relative value of gold at 15 for 1 of silver;  and under the natural presumption that gold and silver coin would compose a portion of the general circulating medium, it has also been enacted, that a tender of either of those metals should be the only legal mode of discharging obligations.  In practice, however, and in fact, our currency consists altogether of paper.  In this State, (Maryland,) and in Pennsylvania, Virginia, and perhaps some others, the fractional parts of a dollar circulate in sufficient quantity to purchase with coin, marketing, or other low priced necessaries;  but in the Carolinas, Georgia, and all that great district eastward of Pennsylvania, composing the States most distinguished for commerce and manufactures, and for wealth, there is no transfer of the value of the established unit that is not effected by paper.  This Bank paper is sustained by public confidence on a specie basis, considered sufficient to liquidate balances accruing among the several States, and to supply the demands for foreign commerce."