The Journal of Banking
by William M. Gouge,
Their Use and Abuse.
Hard money men have, sometimes, been accused of acting inconsistently, because they have, in particular states of public credit, proposed issues of Treasury notes to supply the wants of Government. The accusation can with justice be brought against such of them, (if any such there be,) as may have proposed the issue of Treasury notes, in such form and of such denominations as would serve as a currency.
If any hard money man, for example, has proposed the issue of Treasury notes of as small denominations as five, or ten, or even twenty dollars, bearing no interest, that man has acted inconsistently with his principles. For, such notes would be just as effective as bank notes in driving gold and silver from circulation.
But Treasury notes of the denomination of fifty dollars and upwards, and bearing the market rate of interest, do not become currency. They are hoarded by capitalists as profitable investments. They may be remitted from point to point as bills of exchange: but hard money men do not object to bills of exchange.
Treasury notes of suitable denominations and bearing the market rate of interest, are exactly similar in their character to the notes of hand given by farmers and mechanics. Government does, indeed, receive these Treasury notes in payment of debts due to itself: but what farmer or mechanic, having a large amount of debts due to him, would refuse to receive payment of them in his own outstanding obligations ?
It is to be regretted that any occasion exists for the use of such paper; but hard money men are guilty of no inconsistency, when they propose to issue Treasury notes to supply the wants of Government, in preference to borrowing bank notes or bank credits. The exchange of evidences of Government credit bearing interest, for evidences of bank credit bearing no interest, is altogether inconsistent with hard money principles.
If Bank and State were separated, and if our Treasury system were properly organized, then hard money men would act inconsistently with their principles, if they should propose an issue of Treasury notes (unless to meet some temporary exigency,) if it were possible to borrow the requisite sum in specie, and on reasonable terms.
But suppose we should now attempt to borrow ten millions in specie. For whose benefit would we borrow it ? As the Governmental depositories have been abolished, this sum would go into the vaults of the "pet banks." and inure to their benefit.
Suppose we borrow bank notes and bank credits ? Hard money men contend for a complete separation of Bank and State. They contend that Government should neither lend to the Banks nor borrow from them. Every loan of credit by the Banks to Government, necessarily occasions more or less derangement of all the commercial operations of the country.
In this crisis, there would seem to be no way in which the wants of Government can be so readily met, as by funding the Treasury notes already issued, and issuing others to be funded hereafter, if the public revenue shall not suffice for their redemption.
If any like not to push this mode of borrowing to any great extent, especially in time of peace, (and we confess it is not free from objection,) let them labor to do away the necessity for it, by properly organizing the United States Treasury. Let proper depositories for the public money be provided, with suitable safeguards, and then let hard money loans be negotiated. In this way Government may be made to contribute its part towards supplying the country with a sound circulating medium.
In the true theory of finance, the use of Treasury notes is admissible only to supply temporary deficiencies of revenue. As, according to present prospects, there will, for years to come, be a deficiency in the United States Revenue, it is much to be desired that the Treasury should forthwith be so organized as to admit of the negotiation of hard money loans.
A fundamental principle of finance is, that, whenever a debt is incurred, unless it be to supply some temporary deficiency of revenue, a tax should be imposed, sufficient not only to pay the interest of that debt, but ultimately to sink the principal. This holds good whether Treasury notes or certificates of Stock are issued as evidences of the debt. It is through neglect of this principle, that the credit of the States has been swamped; and if it be neglected by Congress, the credit of the United States will, in a few years, be on a level with that of Pennsylvania and of Indiana.
There is, indeed, one way in which the credit of the United States may be sustained, without resorting to additional taxation, and that is, by restoring to Government the proceeds of the public land sales, and by reducing the public expenditure. If this be practicable, let it be done. The times for trickery in finance have gone by. Either reduce the expenditures, or increase the revenue. Otherwise the ability to borrow in any way, will soon be exhausted.
The State of the Country.
What a spectacle our country presents. We have a fertile and extensive territory, embracing a great variety of climates, and great diversities of soil, producing in abundance all the necessaries and many of the luxuries of life. We have capital and skill sufficient to turn these natural advantages to the best account. Our people are industrious and enterprising. They are in possession of all the improvements in the arts, and discoveries in the sciences, which the experience of six thousand years has given to the world. In the long period of sixty years, they have had but three years of war.
And yet embarrassment pervades the land.-- Hundreds of thousands of our citizens are said to be actually bankrupt. Hundreds of thousands of others are said to be on the verge of bankruptcy. The accumulations of long years of industry and frugality are daily vanishing from the sight of those who thought they had in those accumulations the means of supporting themselves in their declining years. And many of those who still have strength to labor, if they seek for employment, find it difficult, if not impossible, to get profitable employment.
In the midst of all the elements of wealth, general embarrassment prevails. To what is this owing ? To one cause, and to one cause only. To the violation of those provisions of the United States Constitution, which were intended to make this a hard money government, and a hard money country. In our paper money, we have had a false measure of value, and this has led us to place a false estimate on every thing. Many of our enterprises have consequently been foolish, and our investments injudicious. On our paper money has been founded a system of factitious credit. --The foundation gives way, and the superstructure tumbles accordingly.
Are the State Governments embarrassed ? It is owing to the same cause as the embarrassment of individuals. Without paper money banks, there would have been no State debts, or at least none of any moment. It is through the facilities for borrowing which these institutions have afforded, that millions have been expended on useless canals and equally useless rail-roads.
The present times are gloomy, and the prospects for the future more gloomy still. In days of former trouble, corporations gave way and individuals gave way. But as the States then maintained their credit, there was something for the community to fall back upon. But now there is every probability of a general, we do not say a universal, bankruptcy of the State Governments.
Ten years ago, we could see a way in which this execrable system of paper money and the system of factitious credit founded thereon, might be got rid of without a convulsion. But, we confess, we can see no such way now. A system which was unsound from the beginning, has been suffered to continue too long. A convulsion must come. Nay, it is already begun, and will continue till it produces such a revolution in property as will to multitudes be quite as disastrous as could be a revolution in the Government.
Happy will the people be, if by tracing effects up to their cause, they avoid the recurrence of such convulsions in future. Happy will they be, if they can prevent the building up of some new paper money system, out of the ruins of that which has been the cause of so much misery !
The old articles of confederation contained a clause authorizing Congress "to emit bills of credit." When the present constitution was formed, an attempt was made to introduce into it a similar provision, but it was rejected. Reasons sufficient for this will be found in the short but full history of continental money, which will be found in another part of the present number. These reasons ought to command especial attention at a time when a proposition is before Congress to make a fresh issue of Governmental paper money.
The Bank of North America.
The early history of the Bank of North America, which follows the history of Continental Money, is a history of paper money banking in miniature. Though operating singly, this bank, by its contractions and expansions, produced such convulsions, as in less than four years led to a repeal of its charter. Yet such was the power of associated cupidity that the charter was afterwards restored.
The Old Bank of the United States.
The history of this bank, which will be found in another part of this number, affords some remarkable points of contrast with the late, or "Biddle" Bank of the United States. Though suddenly called upon to wind up its affairs, it not only paid its noteholders and depositors in full, but paid stockholders 97 per cent. on the par value of the shares, and interest on the time for which payment was deferred.
The old Bank of the United States was a commercial; the "Biddle" Bank, a stock-jobbing and land-jobbing institution. Hence the difference in the results which their history presents. The old Bank of the United States was, perhaps, as well managed as a paper-money bank could be. --It issued no notes of a less denomination than ten dollars, and for these, such was the state of public opinion, only a limited circulation could be obtained. Yet, it is hardly necessary to tell the reader, who is acquainted with principles, that the old Bank of the United States produced such effects as are inseparable from paper-money banking. They were-- gain to the few: loss to the many. Excess of currency to-day: scarcity to-morrow. The monopoly it created was a closer one than ever existed in this country, either before or since; and desire to share in the gains of so very profitable a monopoly, rather than an opposition to paper-money banking, appears to have led to a non-renewal of the charter. The constitutional objections to the bank were, indeed, unanswerable; but they alone would never have put an end to this powerful institution.
A select committee of the House of Representatives has reported "a bill for the relief of the people," that is to say, "a bill to authorise the issue of five millions in Treasury notes, to be lent to the people of the different counties." This is beautiful. A State which already owes about fifteen million dollars, and the five per cent. stock of which is sometimes between 80 and 90 per cent. below par, authorising an additional debt of five millions.
Another committee has reported a bill to authorise the State Bank to issue notes of a less denomination than five dollars. By the aid of these two contrivances together, "money" may be made plenty enough in Indiana; and as a committee of the Legislature say "that it is the great scarcity of money which is now weighing down the energies of the people," it is hoped they will be effectually relieved.
In his message to the Legislature, the Governor states that the funded debt of this State is $36,330,005.48, besides $2,867,514.78 due to the United Stares on account of deposit of surplus revenue, and a floating debt, due to contractors, and others, the exact amount of which is not stated, but which is believed by some to be very considerable.
The annual interest on the funded debt is about $1,800,000. To meet that portion which is due on the first of February, there was in the Treasury on the first of January $1,020,936.68, a sum which will be amply sufficient, if a preference be given to the claims of holders of State stocks over those of other public creditors.
To the contractors on the North Branch Canal and Erie extension, the sum of nearly one million dollars is due. The Governor suggests that, if no better expedient can be devised, they should be paid by a new issue of six per cent. stock.
An additional issue of six per cent. stock is recommended by the Governor, "to be thrown into market to sell for whatever it will produce," in order to redeem the $1,756,650.68 of State bills of credit, issued under the authority of the relief law of the last session.
If this measure should be resorted to, the probability is that Pennsylvania sixes would fall at least 75 per cent. below par. It would consequently require about seven millions of six per cent. stock to redeem about a million and three-quarters of State bills of credit.
The truth is that the credit of a State is "on its last legs," when it is reduced to the necessity of extorting loans of a dollar a head, from every chamber maid and waiting boy in the State, and every body else who has a dollar to lend, especially when this loan is not openly negotiated, but effected through an issue of paper intended to serve as a substitute for money. To this financiering expedient did the State of Pennsylvania resort in June last.
The business of laying, or at least of collecting taxes, has been delayed too long; and the best that can now be done is to sell the public works, or portions of them, for what they will bring, taking payment in State stocks and State bills of credit. Under State management, they do not appear to yield enough to pay for repairs and superintendence. In the hands of companies, they might be rendered productive.
Of those rail roads and canals, 738 miles are completed, and 165 miles are in an unfinished state. They have cost upward of thirty millions of dollars. Perhaps if offered for sale, they would not bring more than half that amount, even if payment should be made in State stocks.
In the business of internal improvement, we Americans certainly excel all other people. We lay our plans with so much wisdom, and are so particularly skilful in devising ways and means for their proper execution.
The circulation of the banks of the State of New York, is said to have amounted to the following sums on the 1st of January, in each year, from 1837 to 1842.
Year. ... Safety Fund Banks. ... Free Banks. .......... Total.
1837 ......... 24,198,060 .......... none ...... 24,198,000
1838 ...... 12,432,478 .......... none ...... 12,432,478
1839 ...... 19,373,149 .... 2,500,000 ... 21,873,149
1840 ...... 10,360,592 .... 6,012,000 ... 16,372,592
1841 ...... 15,235,053 .... 5,353,067 .... 20,588123
1842 ........ 8,100,000 .... 4,000,000 ... 12,100,000
The amount of circulation of the free banks for 1842 is estimated.
On a hard money system, the currency of the State of New York would have increased gradually in each year, from 1837 to 1842, exactly in proportion to the increase of wealth end population. But under the paper money system, we find the currency first decreasing at the rate of nearly 50 per cent., then increasing at the rate of 90 per cent.; then decreasing at the rate of 24 per cent., then increasing at the rate of 2.5 per cent.; and then decreasing at the rate of 40 per cent.
Such fluctuations must have produced the ruin of thousands. No doubt, though, some have been enriched by these changes of currency. We are told that there are "down east," a number of gentlemen who support the present banking system, not from ignorance of its character, but because they think they can, by taking advantage of the fluctuations it produces, make more money for themselves than they could with a hard money currency. These same gentlemen would very seriously object to the use of false dice in any common gambling game.
Bank of the United States.
The directors in their report to the stockholders on the 3rd of January last, speaking of the sale made by them, of the Merchants' Bank of New Orleans, state that the stock of that bank, cost the United States Bank $1,100,000, or 110 dollars a share ____ that, according to a minute estimate of the assets of the Merchants' Bank, made in April last, the interest of the United States Bank therein, was equal to $906,000, or about 90 dollars a share, but that owing to the difficulty of realizing bank assets, and owing to the straits to which the United States Bank was reduced, it was deemed advisable to sell the Merchants' Bank to Mr. Edward Yorke of New Orleans, at the rate of fifty-seven dollars and fifty cents a share.
We pretend not to question the wisdom of the board in making this sale. But as there was, among the assets of the Merchants' Bank, the sum of $334,427 in specie, we should like to know the exact value of all the bank stock in the country estimated on like principles.
Another transaction to which the Board refer in their report, is the final arrangement with their agents, or, as they are called, "The Associates of the Bank of the U. States in New York." By the terms of contract with them, they were to receive twelve thousand dollars a year for fifteen years, and the bank to pay all the expenses of the agency. Wishing to get rid of this contract, the case was submitted to arbitrators, and an award made in favor of the associates, of $101,613.60, "which was paid by the Bank." Would "the Associates" have received this amount, if their claim had been suffered to rest on the same basis as those of other creditors of the Bank ? What right in equity have they to compensation for services they never rendered. A skilful lawyer could probably recover the amount from them, for the benefit of the general creditors of the Bank. As a condition of affairs supervened, in which it was impossible to render the services contemplated in the contract, the contract itself should have been regarded as of no value. What with compensation to some "for services rendered," or supposed to be rendered, and with compensation to others for services never rendered, little will be left for note holders and depositors, to say nothing of stockholders.
Mr. Richard Alsop, one of "the Associates of the Bank of the United States in New-York," endorsed certain bonds issued by the Planters' Bank of Mississippi to the Bank of the United States, and now refuses to pay them on the ground that the bonds were sealed instruments, and consequently binding on only the Planters' Bank and the United States Bank. The present holders of the bonds view the matter in a different light, and have it is said attached the property of Mr. Alsop in the City of New York and in the State of Connecticut.
It would seem as if the Bank of the United States is to be the cause of trouble to all who have in any way been connected with it. The English stockholders are likely to be the greatest sufferers. As the bank opened an office in London, and had no British charter, the English stockholders are, according to an article in Vethake's edition of Mr. Culloh's Commercial Dictionary, liable in their personal capacity for any debts the agency there may have contracted with British subjects. Thus, the English stockholders, in addition to losing all the capital they invested in the bank, may be made to pay a large portion of the loans negotiated by Mr. Jaudon in England.
Some of the chief authors of these troubles, to-wit, Nicholas Biddle, for many years President or the bank, Thomas Dunlap, his successor in that office, S. Jaudon, and J. Cowperthwaite, formerly Cashiers of the bank, were, on Thursday, January 13th, brought before Recorder Vaux of this city, on a charge preferred against them by Austin Montgomery, of defrauding the stockholders of the bank. The court room was thronged, and at the reading of several of the papers produced in testimony, there were suppressed exclamations of wonder and contempt from the crowd. Most of these papers were believed to refer to expenses incurred at Harrisburg and elsewhere, in procuring a charter for the bank from the State of Pennsylvania.
On Friday, the 14th, the examination was continued, and also on Monday the 17th. At the close of it, the Recorder ordered that "Nicholas Biddle, Thomas Dunlap, John Andrews, Samuel Jaudon, and Joseph Cowperthwaite, each enter into a separate recognizance, with two or more good and sufficient sureties, in the sum of $10,000 for their appearance at the Court of General Session for the City and County of Philadelphia, to answer the crime of which they thus stand charged."
The Lebanon Miami Banking Company, the Farmer's Bank of Canton, the Miami Exporting Company, the Bank of Cincinnati, the Exchange Bank of Cincinnati, the Farmers' Bank of Orleans, New York, and the Suspension Bridge Bank of Upper Canada, are broken. As the circulation of the last mentioned was chiefly in the neighborhood of Buffalo, the principal part of the loss will fall on American citizens.
The first teller of the Commercial Bank of New Orleans, is a defaulter to the amount of $18,000; and the second teller, to the amount of $8,300. Both have been committed to prison. Their sureties are said to be abundantly able to make up the loss.
The Cashier of the Manufacturer's Bank at Pittsburg, has resigned his station, in consequence, it is said, of some financial slip.
The Grand Jury have found a bill against C.F. Blanchard, teller of the Citizens' Bank at Boston, for embezzling 19,000 dollars.
Some of the Western papers say that Mr. W.McK. Ball, once cashier of one of the branches of the Arkansas Real Estate Bank, and who was accused of being a defaulter, has "run his slaves into Texas."
Whitney, the ex-cashier of the Gallipolis Bank, has escaped from prison.
The Secretary of the Hand in Hand, a mutual fire insurance company of this city, has proved a defaulter to a small amount to the company, but to a large amount to his friends. He is of respectable descent, is respectably connected by marriage, and was enjoying a salary of 2500 dollars a year; but he could not resist the temptations to speculation which the times sometimes since held out, and ruin and disgrace are the consequences.
Forgeries of mercantile notes and of checks, are matters or such common occurrence, that we can no longer find room to record them one by one. The business is not confined to men and boys. The women are beginning to engage in it. "A lady in black," at New Orleans, lately succeeded in negotiating several counterfeit drafts.
The commitments to the Philadelphia County prison in the month of December, 1841, amounted to 420, being 180 more than in the month of December, 1840. As the troubles of the times increase, we must look for an increase of crime and vagrancy.
The knowledge of the true principles of money and of credit, ought to be as widely diffused as the knowledge of the multiplication table. This object can never be attained by means of the press alone, for it is impossible to prevail on more than one man in ten to read enough on the subjects of currency and credit, to come to a thorough understanding of them. But let four or five men in each neighborhood be properly indoctrinated, and they will in due time indoctrinate the others, by conversation, by lectures, by debates, and by "stump speeches." All these means must be resorted to.
All the pecuniary sufferings of the inhabitants of the United States, arise from ignorance of political economy on the part of either the people or their rulers. Whoever, therefore, can prevail on his friends and neighbors to engage in the study of this science, renders a service to his country.
A blind feeling of hostility to banks may do much harm. Wherever it exists, we should endeavor to substitute for it, an intelligent view of the evils which paper money banking produces, and of the manner in which they are to be removed. On but few subjects is precision of thought more desirable than on those of money and credit.
A tremendous riot has occurred at Cincinnati. Considerable feverishness has, it seems, existed there for some time in regard to the issues of certain banks. This was increased greatly by the explosion of the Lebanon Miami Bank, by a resolution of the butchers no longer to receive certain kinds of paper, and perhaps not a little by a decision of one of the Courts, that the notes of the unauthorised banks, as they are called, could not be collected by legal process. As the law could afford them no redress, certain parts of the population unhappily resolved to take the matter into their own hands, and avenge, if they could not redress their own wrongs.
On the 10th, the Miami Exporting Company closed its doors; and early on the morning of the 11th, a large crowd assembled in front of the Bank of Cincinnati, to demand in exchange for its paper, not specie, but the notes of less suspicious institutions. The Bank of Cincinnati could not long stand the run, and the officers posted on the door a notice that it "had suspended for twenty days." An effort was made to close the door, but the crowd rushed in, and destroyed books, papers, furniture, every thing.
They then passed to the Miami Bank, "and did unto that even as they did unto the other."
A rush was next made for the Exchange Bank, which had continued to redeem its own paper, but refused to redeem the notes of the West Union Bank, for which it had acted as agent. "It was violently assailed, and soon riddled as completely as the others had been."
The shop of a broker of the name of Lougee, was then broken open, and its contents scattered about and destroyed. His offence was his connection with certain issuers of shinplasters.
The Mechanic's and Trader's Bank was run upon through the day, but as it redeemed all its paper that was presented, it escaped destruction. "A number of brokers, for real or supposed connections heretofore with Shinplaster Manufactories, were threatened but not molested."
From an early hour in the morning till dark, the mob appears to have been triumphant. The riot act was read, but they regarded it not. Some of the oldest and most respectable citizens of Cincinnati addressed them, but their exhortations, whether made to them en masse, or individually, were entirely unsuccessful. The military fired, and wounded one man severely, and several slightly, but appear to have been either unwilling or unable to take the measures necessary to disperse the crowd.
This is a dreadful state of things; not, perhaps, such as ought to have been unexpected; but not, therefore, the less to be deplored. Whether the feeling spreads or not, the bare apprehension that it will spread, has a tendency to cause a further depreciation of bank paper, and thus cause the innocent holders of this kind of currency, who have already lost millions by it, to lose millions more.
Besides this, when mob violence begins, who is to say where it will end. The object of the greater part of a mob, may be merely to redrew wrongs, which the Judiciary or the Legislature will not or cannot redress. But in every large city there are multitudes of men looking out for plunder. Let the practice be tolerated of breaking open even fraudulent banks, and the next step will be the breaking open of dwelling houses, and the rifling of their contents, not indeed, by those who by mob violence attempt to redress pubic or private wrongs, but by others under cover of their example.
The riot, mentioned in our last, as having occurred at Cincinnati, was followed by one on the next day at Louisville. Mr. Lougee, who had rendered himself obnoxious by his connection with the "shinplaster" business, had an establishment at Louisville. The mob entered that, and destroyed books and papers. The "valuables" had previously been removed by the Cashier.