The Journal of Banking
by William M. Gouge,
Rhode Island and Paper Money.
Extract from "America Dissected, &c., --by a Reverend Divine of the Church of England:-- Missionary to America, and Doctor of Divinity. -- Dublin, 1753."
"The Novanglians in general, the Rhode Islanders in particular, are the only people on earth who have hit on the art of enriching themselves by running in debt. This will remain no longer a mystery, than I have related to your Honor that we have no money among us, but a depreciated paper currency: and this in the current of thirty years has dwindled down from 6s. and 8d. to 4s. per ounce. He who disposes of his goods on long credit, and another who lends his money at 10½ or even 15 per cent., the first loses his profits, and the lest some of his principal, besides all the interest. Indeed, a new act of the British Parliament, ill penned, passed last winter to restrain us; but such things are only Bruta Fulmina, and we shall go on, I doubt, in our old way of Paper Emissions, unless the Lord in mercy to us should dispose the Sovereign Power to vacate our Patent, and prevent our destruction by taking us out of our own hands!"
Extract from a letter in the Madison Papers, from James Madison to Edmund Randolph --1787.
"Rhode Island has negatived a motion for appointing deputies to the Convention by a majority of twenty-two votes. Nothing can exceed the wickedness and folly which continue to reign there. All sense of character as well as of right is obliterated. Paper Money is still their idol, though it is debased to eight for one."
Extract from a letter from James M. Varnum to General Washington, 1787.
"The majority of the administration is composed of a licentious number of men, destitute of education, and many of them void of principle. From anarchy and confusion they derive their temporary consequence; and this they endeavor to prolong by debauching the minds of the common people, whose attention is wholly devoted to the abolition of debts, public and private. With these are associated the disaffected of every description, particularly those who were unfriendly during the war. Their paper money system, founded in oppression and fraud, they are determined to support at every hazard; and rather than relinquish their favorite pursuit, they trample upon the most sacred obligations."
In 1837, the news of the suspension of specie payments in the city of New York was received with cheers by the people of Providence, who were assembled at the steam-boat landing, when the boat arrived which brought the intelligence.
In 1841, at the extra session of Congress, one of the Representatives from Rhode Island delivered a speech, wherein he defended suspensions of specie payments by the banks, on the ground that they were beneficial to the people, by enabling them to discharge debts contracted in a good currency, by payments in a depreciated currency ! "Paper money is still their idol."
Resumption of Specie Payments.
The reader may believe it or not, just as he chooses, but the fact is, that we did not go very heartily for the last resumption of specie payments --we mean for the twenty days' resumption. The simple truth is, we were well convinced then that the banks could not maintain specie payments; and we could see no use in their resuming merely to suspend again. We could see no use in their subjecting the people to all the evils which follow a contraction of currency, merely that that contraction might be followed by another and a greater expansion.
And yet, we must confess, that in one respect our sagacity was at fault. We thought the banks, if they resumed, might continue specie payments for about three months: but less than three weeks exhausted all their means. The very brokers were, however, caught napping on that occasion.
The popular cry is now for resumption of specie payments, and we join in it. Something must be done, for matters are growing worse and worse every day. Specie is daily leaving the country in large amounts, being driven out of circulation by inconvertible paper; and the rates of exchange at New York, on Pennsylvania, Virginia, Ohio, Indiana, and Illinois, are rising instead of falling. Throughout the suspended region, the banks generally appear to be making no preparations for resumption; and many of them seem to be shaping their course with a view of preventing specie payments during the life-time of the present generation.
Specie payments ought to be resumed as speedily as possible; and the question is, how can this result be most easily effected. After reflection on the subject; we have been brought to believe that the best way will be by appealing to the interest of the banks. This may be thought derogatory to the dignity of sovereign States. But the truth is, that when a State Government creates a paper money aristocracy, it creates something which is more powerful than itself. The interest account of each bank is the only safeguard we have against the abuse of the privileges conferred on it by its charter: and we must make it the interest of the banks and bankers to do justice to the community.
A majority of the members of the State Legislatures, about to be convened, have been elected as friends of bank reform. But how long will they remain so ? A majority of the members of the Legislature of Pennsylvania are generally friendly to bank reform at the commencement of a session: but before its close, a majority are generally opposed to it. The influence of the banks does not cease at the close of the polls. It is felt with great force in the Legislative halls. The sophistry of the bank orators deludes some very honest men. Others are frightened by representation of the inconveniences which bank reform, in its first stages, must necessarily produce. There still remains a numerous class that can be neither frightened nor bamboozled: but some of these may be bought. And this, in modern parlance, is not "bribery and corruption." For what were banks instituted but to lend money ? And where is the clause in their charters, that prohibits their lending liberally to members of the Legislature ?
Our judges, too, present no small obstacles to bank reform. When questions come before them which affect banking interests, they too often show by their decisions, that the boasted independency of the judiciary is little more than an independence of common sense and common justice. It is chiefly owing to the misconduct of the Judges, as we learn from the Ohio papers, that the banks in that State have so long been able to bid defiance to the laws.
Such, then, being the constitution of our Legislative bodies, and of the Judiciary, if any very stringent measures are proposed, they will probably not receive legislative sanction: or, if they should, the judges will exert their ingenuity to find some flaws in the acts which will render them nugatory.
Our only safe course, then, is to appeal to the interests of the banks: and this we do if we prohibit them from making any dividends, or any loans or discounts, to any stockholder or officer of the banks till after they shall have resumed specie payments, and have sustained the same for at least three months.
The banks have now an interest in refusing to pay specie, because thereby they can make larger dividends, and larger loans to their stockholders, than would otherwise be practicable. Let their interest lie the other way, and they will shape their course to suit their interest. We have always believed that the prohibition to make dividends while in a state of suspension, was the efficient cause of the resumption of specie payments by the banks of New York.
One advantage that will attend this mode of proceeding will be, that it will carry public opinion with it. Even the paper money men (at least such of them as retain any degree of rationality) will not object to means which simply prevent the banks and bankers from reaping a profit through the violation of their engagements.
Another advantage will be, that it will cause the inconveniences of the contraction of currency, which must necessarily precede a resumption of specie payments, to fall first on bank stockholders and bank officers; and on them it ought, in justice, to fall.
There may, however, be some States in which it may be advisable to resort to more stringent measures. There may be some States, in which it may be advisable to say that the banks shall resume specie payments on or before a certain day, or else go into liquidation. In recommending the milder course herein suggested, we have reference to the immense influence which the bank power exercises, in most of the States, over members of the Legislature, over the Judiciary, and over public opinion. We have, to use a common expression, "got our hand into the lion's mouth, and we must get it out as well as we can."
But, whatever laws are passed, let it not be left to the option of private individuals to carry them into execution. In Kentucky, as we learn from the Frankfort Yeoman, no act has been passed to sanction the suspension of specie payments; yet the banks there, pay as little regard to the laws where it is left to private individuals to enforce them, as they do in Ohio, where the Judges have interfered to prevent the laws' having their just operation.
It should be the especial duty of certain State officers, to enforce the State laws for the regulation of the State banks.
Paper and Specie.
In a subsequent part of this number will be found some remarks on "The evils that would be produced by the sudden dissolution of the system" of paper money banking, and on "The proper mode of proceeding" in order to get rid of it. Great changes have necessarily occurred in the ten years that have elapsed since those remarks were written, yet these changes do not affect any of the principles therein laid down, as they are only changes in proportions.
Then the current credits of the banks (circulation and deposits taken together) amounted to about one hundred and nine millions. Now they amount to about one hundred and eighty millions. Then the amount of specie in the country was about thirty-two millions. Now it is estimated at about eighty millions.
Then the gross income of the nation was estimated by writers on statistics at about one thousand million dollars per annum. Now it is estimated at about one thousand five hundred millions.
Then, our exports of domestic produce amounted to between fifty and sixty millions annually. --Now they exceed one hundred millions.
The bank burden has been increased in the last ten years: but the ability of the people to throw it off, has increased in at least an equal proportion. We have now a much larger quantity of surplus produce wherewith to purchase abroad so much gold and silver as would be requisite to give us a sound circulating medium.
Gold and Silver Coinage.
Since our chapter entitled "Of a new gold coinage," was first published, a new adjustment has been made at the Mint of the ratio of gold and silver: but we have left the chapter unchanged, because we believe the principles therein laid down to be correct, and think they ought to be acted on, when changes in the relative value of the precious metals, in future years, shall call for new adjustments of the Mint ratios.
To the honor of the American Government be it stated, that it has never, since the adoption of the Federal Constitution, made any change in the quantity of pure silver contained in the money unit --the silver dollar. Before the law was passed for establishing the Mint, a few dollars were, indeed, coined, containing 376 grains of pure silver. But very few of these were thrown into circulation --so few that they never became the practical standard of value.
The act for establishing a Mint was passed on the 2nd of April, 1792. It provided that the dollar should contain 371 grains of pure silver, and 44 grains of alloy, or 416 grains of silver, of which, in every thousand parts, 892 should be fine: and that the eagle should contain 247 grains of pure gold, and 22 grains of alloy, or 270 grains, of which, in every thousand parts, 916 should be fine.
Under this act, the ratio of gold to silver, at the American Mint, was 15 to 1: that is to say, fifteen ounces of pure silver were regarded as of equal value with one ounce of pure gold.
These proportions remained unchanged till the 28th of June, 1834. Then, in consequence of a rise having taken place in the market value of gold as compared with silver, an act was passed, establishing the Mint ratio at 16 to 1: that is to say, estimating one ounce of pure gold as worth sixteen ounces, one grain, and .05 part of a grain of pure silver.
This act reduced both the weight and the fineness of our gold coins. It provided that the eagle should contain 232 grains of pure gold, and 26 grains of alloy, or 258 grains in all, thus diminishing the quantity of pure gold in the eagle 15½ grains, and increasing the alloy 3½ grains. In every thousand parts, there were to be 899 of pure gold.
This law remained in force only two years and a half. On the 18th of January, 1837, another act was passed by Congress, chiefly with the design of causing both the gold and silver coins to contain the same proportions of alloy that is to say, of causing each to contain, in every thousand parts, 900 parts of pure metal, and 100 parts of alloy. This act reduced the weight of the dollar from 416 to 412½ grains; but the reduction is wholly in the alloy. Dollars coined under the act of 1837, have in them the same quantity of pure silver as dollars coined under the act of 1792, namely, 371¼ grains: but the alloy is reduced from 44¾ to 41¼ grains.
This act increased in a very slight degree the fineness of our gold coin. Eagles coined under it should each contain 232 grains of pure gold, and 25 grains of alloy. They differ from the eagles coined under the act of 1834 only in containing one-fifth of a grain more of pure gold, and one-fifth of a grain less of alloy.
Under this act, the Mint ratio of gold to silver is 15.9 to 1. In other words, an ounce of pure gold is regarded as worth sixteen ounces of pure silver --less five grains and 0.6 parts of a grain.
We trust that there will be no more alterations in the weight or fineness of either the eagle or the dollar. The proportion of alloy that each now contains, being one-tenth, is such as can be easily remembered. When new variations arise in the value of gold and silver as compared with one another, either let gold pieces be coined of entirely new denominations, or else let gold be issued from the Mint in ounces, and parts of the ounce, avoirdupois, and suffered to pass in the market for whatever it may be worth.
The United States Bank.
It is said that some of the creditors of this institution, have brought suits against certain members of a former Board of Directors, who assented to the declaration of a dividend at a time when they must have known that the bank had no means of making any dividend except out of its capital. It is asserted that one clause in the charter of the bank makes the Directors responsible in their private capacity for the amount of dividends so declared.
As a similar clause is to be found in the charters of most, if not all of our banks, the Directors of the United States Bank are not the only ones against which such suits may be brought.
The Government of the United States, it is said, has filed a bill in equity, the object of which is to annul all the assignments made by the bank. "If this suit should be successful," says the Public Ledger, "it will take the seven millions of securities assigned to secure the seven millions of post notes held by the city banks, and divide them among the creditors pro rata. And what then becomes of the banks ?"
The notes of the United States Bank are now at a discount of 37 to 40 per cent, in currency. The fluctuations in the value of these notes are very great. Those who owe large sums to the bank, have an interest in depressing the value of the notes; and the stock gamblers have an interest occasionally in raising them. Between the two, the public are fleeced unmercifully.
The currency committee of Baltimore, have at last prevailed on the Franklin Bank of that city, (a bank that broke some time ago,) to receive on deposit the notes of the Baltimore and Ohio Rail Road Company, and seem to hope that by such arrangement as this, the currency of this paper may still be maintained.
The Baltimore and Ohio Rail Road Company has recently declared a dividend of two per cent, and paid the same in bank notes. If it had used the funds with which it paid its dividend, in redeeming part of its outstanding issues, it would have done more towards raising the credit of its paper than can possibly be effected by any arrangement with the Franklin Bank. However, a promise to pay interest on such of the Baltimore and Ohio Company's notes as may be left on deposit for a month or upwards, has produced some rise in the value of this paper.
Governor McDonald in his message to the Legislature, makes some very sound remarks on the subject of banking, but proposes to remedy the evils the present system produces by establishing a State Bank with branches. This is the worst possible form of banking, except that of a United States Government Bank of discount and exchange.
The Governor states that, during the year, the circulation of the Central Bank of Georgia has been increased upwards of one million dollars. When the reader is informed that the whole of the stock of this bank is owned by the State, that it is in fact a Government bank, he will feel less surprise than he otherwise would on hearing of this immense increase of circulation.
From the following extract from the Missouri Republican, it appears that though the Bank of the State of Missouri continues to pay specie on the few notes it has in circulation, it is, as regards currency, little more than an agent for the suspended banks of the neighboring States and Territories. It receives their notes on deposit, and pays them out again, thus aiding in making them the circulating medium of Missouri.
This practice must be prohibited wherever it is intended that the banks shall make a bona fide resumption of specie payments; as otherwise we shall only be substituting one kind of inconvertible paper for another.
"The notes of the Bank of Missouri, State Bank of Illinois and branches, Bank of Illinois, State Bank of Indiana and branches, Bank of Kentucky, and the Ohio Life Insurance and Trust Co., and the Commercial, Lafayette, and Franklin Banks of Cincinnati, and the notes of solvent banks of Wheeling and Pittsburg, and eastern cities, are received by our bank and offices of discount and deposit as par funds. The notes of the Cairo Bank and the Miner's Bank, Bank of Dubuque, together with the issues of City and County Warrants, are received by two of the offices on deposit and in payment of debts; they pass in ordinary transactions at par, and large amounts can be converted into 'par funds' at 1 per cent. premium. The same may be said of the certificates of the Wisconsin Fire and Marine Insurance Company. Missouri State Bank (parent) 7 per cent. premium; branches, 4 to 5 do."
At a mass convention at Kingston, N.Y., the following resolution was adopted.
"Resolved, That the system of banking known as the Free Banking System in this State, of which system State stocks and mortgages on real estate are the basis, is deceptive, and as a system is unworthy of public confidence, and has already inflicted the most serious loss upon the people of this State; that we approve of no feature of this system except its freedom from exclusiveness, that we are in favor of no banking system which does not make the individual property of stockholders HOLDEN FOR THE DEBTS OF THE INSTITUTION; and we demand that all banking companies shall hereafter be governed by the same laws that regulate ordinary co-partnerships in all other business."
A New Movement.
Some persons have proposed that those bankers who issue paper money which they cannot on presentation redeem with real money, should receive the same punishment as issuers of counterfeit coin. In Georgia a grand Jury has been found, who seem disposed to act on this principle. They have, as is stated by the Georgia Argus, published at Columbus, "found a true bill against Rhodam A. Greene, President of the Western Bank of Georgia, for a high misdemeanor. The charge is founded upon the refusal of the bank to pay specie. There is a provision of the charter of that bank, which declares that the bank shall not at any time refuse to pay specie, and that upon such refusal, the charter shall be forfeited. There is, also, a section of the Penal Code, which provides, that if any bank officer shall violate any provision of the charter, he shall be indicted for a high misdemeanor.
"The Legislature certainly never contemplated, that the mere act of failing to pay specie, unconnected with fraud, should be an indictable offence; if they did, then every officer of every suspended bank of the State, is subject to indictment."
This is a striking incident in banking history, and shows that a great revolution is taking place in the public mind in regard to bank responsibility.