The Journal of Banking
by William M. Gouge,
Report of the Exchequer Committee.
The Exchequer Committee of the U.S. House of Representatives have made a report which contains many truths.
After some preliminary remarks, the Committee give a short fiscal history of the United States. This is very well as far as it goes; but it is defective in not embracing the following particulars:
1st. In the Federal Convention, a proposition was made to give Congress the power to pass acts of incorporation, and it was rejected on the ground that Congress would then have power to incorporate a bank.
2nd. In the same Convention, two efforts were made to give Congress power "to emit bills of credit," and both were successfully resisted.
3rd. The first revenue act declared that dues to Government should be paid "in gold and silver coin only."
4th. Alexander Hamilton, the first Secretary of the Treasury, within a very short period after the establishment of that Department, on his own responsibility, and in defiance of both law and constitution, gave instructions to the collectors of customs to receive payment of public dues "in bank notes not having more than thirty days to run."
Never since the organization of the Government, have the requirements of law and constitution, in regard to the Treasury and the treasure of the United States, been duly observed. And as it has been by the neglect or the violation of the plainest provisions of law and constitution, that the foundation has been laid of nearly all the pecuniary difficulties of the people and the Government, facts of so much importance ought not to be omitted in any fiscal history of the United States, however short that history may be.
The Committee then make some judicious remarks on the importance of a standard of value. They give us nothing new under this head, but their remarks are none the worse on this account, as what we want on subjects of this kind is not novelty, but truth.
These are followed by some observations on paper money banks, the utility of which appear to us to be overrated by the Committee. They seem, however, to be duly sensible of some of the evils those institutions produce.
The following remarks should command attention:
"It may well be doubted whether the bills so issued by the banks of the States, and constituting a currency, are not bills of credit within the meaning of the prohibition of the Constitution.
"Historically, it is demonstrable that the expression 'bills of credit' applied, in all the period anterior to the adoption of the Constitution, to these bills of banks. There were two forms of bills of credit, recognised in legislation, speech and writing, namely, 'government bills of credit,' and 'bank bills of credit.'
"It seems difficult to conceive how these two species of the same generic thing came to be considered so far different, as that one should be constitutional and the other not. To be a legal tender is not of the essence of either; that is, each had been issued extensively without being declared a legal tender; and in all other respects they are in effect and mischief the same; tending in the same way to excess, alike usurping the place of money, producing the same disorders in the currency, and having the same deleterious influence over the relations of labor and property.
"And it seems to be a strange anomaly of the fundamental law, or, if not anomaly, then oversight, to provide that a State shall not issue bills of credit by the instrumentality of a legal person called its 'treasurer,' but may by means of a legal person called its 'bank;' in other words, that it cannot, and yet that it can, be the derivative source of the issue of bills of credit.
"Nor does it vary the principle, to enact that the bank shall consist in part, or in whole, of incorporated private stock. This appears by the practical fact of the times. Most of the banks of the United States, south of New York, have ceased to pay their bills in cash, a large part of them having failed to make any effective redemption for the space of more than four years. Their bills are an irredeemable paper currency. And their continued irredeemability has been legalized by State Legislatures, in many instances, as the means of procuring to the use of the State Government an issue of bills of credit with which to defray the charges of the State, instead of levying taxes on the inhabitants for that purpose. The State cannot issue bills of credit by its Treasurer; but it can and does by its banks; which is one great cause of the existing disorder in the currency of the United States."
The Committee then proceed to consider what can and what cannot be done in the present crisis by the Federal Government.
"It cannot assume and pay that great mass of individual indebtedness of the people of the United States, which now weighs them down.
--It cannot by any direct act of legislation prevent unwise extension of credit in time or amount, overtrading, speculation, &c., &c.
--It cannot assume and pay the debts which the individual States have contracted on their own account.
--It cannot command and compel the State Legislatures to cease to authorise the suspension of cash payments by the banks.
--It cannot give to the country a paper currency in the bills of an incorporated joint stock bank; for the constitutional objections of the President, and of a considerable part of the members of the two Houses, and the people at large, constitute at present an insuperable impediment to the incorporation of a national bank.
--It cannot equalize the exchanges throughout the country, so long as the currency of most parts of it consists of irredeemable bank bills in various degrees and stages of depreciation.
--It cannot by any act of its own whatever, proceed immediately to fill the channels of commerce with a paper currency equal in rate of value to gold and silver, neither by means of a national bank, nor by any other instrumentality whatever.
"But the Federal Government can adopt the means to furnish a paper currency of par value, to take the place of the depreciated paper currency, so soon as that shall be driven or withdrawn from circulation."
The Committee then pass under review the leading arguments for and against a National Bank, the Deposit Bank system, and the Independent Treasury system, after which they bring forward their own plan. This may be described, in brief, as a Sub-Treasury system, having in connection with it offices of deposit and exchange.
The bill of the Committee is certainly much less objectionable than that presented to the House in the early part of the session, inasmuch as it contains no provision to authorise the issue of Treasury notes to serve as a currency, and as it furthermore prohibits the sale of Treasury drafts, except for cash, and authorises the purchase of bills of exchange only when necessary to transmit the public funds for public purposes. But whether the bill in all cases comes up to the requirements of the constitution, and whether it does not in some of its details transcend the powers granted by that instrument, are questions open to discussion.
Report of Committee of the Senate.
The Committee of the Senate, (Mr. Talmadge, Chairman,) have made a report which contains many truths, though, according to our views, fewer truths and more errors than the report made to the House of Representatives by Mr. Cushing.
There are, however, many passages in the Senatorial report to which we can give our most hearty concurrence --such, for example, as the following:
---[But this exact same committee has not objection to paper, issued on the credit of private banks, circulating as currency.....]
The committee are of opinion that no paper should issue on the credit of the Government to circulate as currency.
There can be but two motives for the issue of such paper. 1. To anticipate the revenue to meet the engagements of the Government. 2. To aid the currency of the country by this addition to the circulating medium.
As to the first, the Committee hold it wrong in principle for the Government to anticipate its revenues by this means. Its tendency would be to excessive issues, and to a reluctance on the part of the Government to levy adequate duties for revenue. Either result would be in the highest degree derogatory to our national character. The revenue of the country should always be adequate to the economical wants of the Government, and the Government should never have occasion to anticipate its revenues. But, if an emergency should happen when its means are not sufficient to meet its engagements, it may get the authority of Congress, as has often been done before, to issue Treasury notes, not as a currency, but as a means of borrowing; Treasury notes, bearing an interest, to be taken as an investment by capitalists, and not as a circulating medium for the people.
As to the second, the committee do not perceive how a currency issued on the credit of the Government can make any permanent addition to the circulating medium beyond the business wants of the country. Such a currency, if it could be put in circulation beyond those wants, would displace and send into retirement an equal amount of the local currency. So that the aggregate amount remaining would be the same as before. Any benefit to be derived by this better currency of the Government, if perchance a currency issued on its credit should eventually be better, would not compensate for the violation of what the committee deem a great and fundamental principle, namely, that no paper should issue on the credit of the Government to circulate as currency.
It is exceedingly gratifying, in times like these, to find the leading politicians of both parties taking a stand against a National currency resting on the credit of Government.
As to the plan proposed by the Committee of the Senate, it is like that proposed by the Committee of the House, a Sub-Treasury system, having connected with it offices of deposit and exchange. Both Committees propose that all notes issued, not bearing interest, shall be, dollar for dollar, the representative of specie actually in deposit. So far, so good, supposing the plan to be faithfully carried out. But the Committee of the House propose that the Exchequer offices shall have unlimited powers to sell bills of exchange for cash; and the Committee of the Senate propose that they shall have power to collect exchanges.
On either plan, the Exchequer offices would, of necessity, degenerate into banks of discount. Such an immense amount of exchanges as they would have to carry on, could not be effected without the purchase of bills on time.
Paper Money Banks.
It is a question with us whether paper money banks do most harm, when they pay specie, or when they suspend payment. To those who have never studied the principles of the system, this may seem a very strange question, but when they reflect on the fact that it is during the time they are paying specie that the banks lay the foundation of the evils we suffer during time of suspension, they may deem the question not unworthy of consideration.
Perhaps we shall be referred to the condition of the city of New York as evidence of the advantages that arise from the banks' paying specie. In New York, last year, between 900 and 1000 new houses were erected; and in Philadelphia, between 1300 and 1400. All that this proves is, that the prosperity of the country is so deeply seated in natural causes, that neither specie paying nor non-specie paying banks can prevent the increase of wealth and population.
There is much distress in Philadelphia. Is there less in New York ? Since the resumption of specie payments, the paper currency of that State has increased in one year at the rate of 90 per cent., decreased in the next at the rate of 24 per cent.; increased in the year following at the rate of 25 per cent., and decreased in the year succeeding that at the rate of 40 per cent. Such fluctuations must necessarily have caused the ruin of hundreds and of thousands; but as "the banks continue to pay specie," their ruin is attributed to some other cause than banking operations.
"The doctrine," says Lord Liverpool, "that nothing is better than a paper circulation convertible into coin, is true to this extent-- that if convertible into coin, the evil will cure itself; whilst one not convertible will lead to nothing but ruin. But how is the cure to be operated ? By the downfall of thousands and hundreds of thousands, and the convulsion of all kinds of property. It is true that the evil carries its own cure, but with such terrible consequences that the cure is worse than the evil."
The notion, that so long as the banks pay specie, the amount of currency is just the same as it would be if only gold and silver coins were permitted to circulate, is all an illusion. Paper money is, even in its best estate, as Dr. Witherspoon used to say, "about as good a measure of value as a woollen thread would be of length." Under a hard money system, our currency would never fluctuate more than five per cent. per annum; seldom more than one, or perhaps a half per cent. --With banks paying specie, it may, as appears from the New York returns, and other evidences, fluctuate 20, 30, or 40 per cent.
So long, however, as the banks pay specie, the illusion is complete. Because the bank dollar never changes its name, the people think it never changes its value.
When the banks do not pay specie, the illusion is less complete. When their notes depreciate so much that a difference is made in the prices of commodities, when paid for in specie or in paper, the illusion is nearly dissipated. Then the bank note ceases to be regarded as money, and is looked upon as mere commercial paper. Then the people are not deluded by it in entering into contracts, and engaging in enterprises.
When the banks do not pay specie, a slice from every man's loaf of bread, goes to the banks or to the brokers. Where the banks pay specie, every other loaf of his bread may be taken bodily from a man, and yet it may be done so dexteriously that it may be impossible for him to tell how he lost his bread, or who has got it.
We do not say absolutely that paper money banks do more harm when they are paying specie, than when they are in a state of suspension; we only say the question is worthy of consideration. The immediate, sensible, palpable evils, are certainly greatest, when the banks are in a state of suspension: but these evils are not without their advantages, inasmuch as they make those feel who cannot reason, and thus open their eyes to the nature of the system. Where the banks pay specie the illusion is so complete that but few even of those who have the power to reason, will make a proper use of that power. The delusive appearances of prosperity which are occasioned by expansions, deceive them in common with the rest of the multitude, and when contractions come, as come they must, they are apt to attribute the ruin that follows to any thing but its true cause.
For the last twenty years, the banks of Great Britain and Ireland have paid specie, and while so doing, have, to use the language of Lord Liverpool, "caused the downfall of thousands and hundreds of thousands, and the convulsion of all kinds of property."
With these views of the subject, we cannot engage heartily in any scheme of bank reform, which engage merely to a resumption of specie payments. It would be only substituting one form of evil for another. The people ought not to rest satisfied short of a radical reform, namely, the substitution of banking by responsible individuals for banking by irresponsible corporations: and the substitution of hard money and bona fide bills of exchange, for paper money bank promises.
The dividend due on the State debt has been paid by the Bank of Pennsylvania, with a nominal advance of 4½ per cent. for the difference between paper and specie: but in such kind of notes that those who received them had, in some instances, to sell them at a discount of 8 per cent., it is said, in order to realise the specie.
The next dividend is due in August. How it is to be paid, puzzles the wisest "financiers."
The Legislature of this State have passed an act requiring the banks to resume specie payments, and it is said about 22 of them are preparing to comply with the requisitions of the law. They have held a meeting by delegates at Columbus, and resolved by concert of action to sustain one another. Part of their plan is to require each bank "to return the notes of all the others to a central point for exchange periodically." This is the Scotch system, and the system known in New England under the name of the Suffolk Bank system. It is the only system through which notes issued by a great number of banks can be kept at par with one another, and with specie, in different parts of the country. It ought to be adopted in all the States.
We have seldom known efforts made to improve the currency by special legislation, that did not do more harm than good. The Legislature of Pennsylvania have, by one simple movement, legislated hundreds of thousands of dollars out of the hands of the industrious classes into the hands of the brokers, and before they have done with the business, they will probably cause some millions to take the same course.
However, in addition to the evils which paper money banking causes per se, we must expect others from the bungling, blundering legislation to which it leads, and bear up under them as well as we can.
A year or two since, the capital of the Philadelphia banks, amounted in round numbers to about 50 million dollars. By the failure of the United States Bank, the Schuylkill, the Girard, and the Pennsylvania, the amount of capital has been reduced, according to an estimate in one of the papers, to about seven million dollars, or, if the selling price of the stock be considered as the true test of its value, to about three millions.
Persons at a distance may be inclined to ask "how is it possible for you to sustain yourselves in Philadelphia after such an immense loss of capital ?" We reply that if every bank in the country should break to-morrow, the amount of real wealth would not thereby be diminished. Banks have seldom any real wealth in actual possession, except their real estate, their furniture, and their specie. The breaking of a bank does not drive this wealth out of existence. The rest of the assets of a bank, consist of promissory notes, bonds and mortgages, &c., which are liens on the real wealth in the possession of individuals. This remains the same, after a bank is broken, as it was before.
But, though this breaking of four of the principal banks of Philadelphia has not diminished the amount of real wealth in actual possession of the community, it has seriously affected the fortunes of individuals, by depressing in value the claims they had in the form of bank notes, bank deposits, and bank stock, on real wealth, in the possession, or supposed to be in the possession, of others. If they have given full value for the stocks, notes, and deposits, the loss to them is just the same as if so much real wealth, actually in their possession, had been destroyed by fire.
We are able to bear this loss, because it is divided among a great many, and persons at a distance share it with us. A very large part of the capital of the Bank of the United States was held abroad; perhaps not more than three or four millions by the citizens of Philadelphia, at the time of the explosion. Of the stock of the Bank of Pennsylvania, 1,500,000 dollars worth, was held by the State.
Still, if we take into account the losses sustained by citizens of Philadelphia, on Vicksburg, and other stocks, we shall find that the aggregate losses sustained by them in the last two years, on what they regarded as permanent investments, cannot be less than fifty million dollars. Divide this equally among the inhabitants of the city and county, and it will amount to about 200 dollars to each. If the loss had been divided equally, it would have deprived many of all they were worth. But the loss has, fortunately, in most instances, fallen on those who have still something left.
As investments in stocks, except by professed stock dealers, are usually made only for the sake of income, the immediate disadvantage sustained by the breaking of banks is to be estimated by the amount of income thus cut off. Fifty millions of stocks at six per cent, would yield three millions per annum. Divide this equally among the inhabitants of Philadelphia city and county, and it would amount to twelve dollars each. But it is not divided equally. And though some of the holders of stocks still have adequate incomes from other sources, not a few of them, we fear, are living, not on income, but on such little remains of their capital as they had not invested in banks.
Relatively speaking, but few of our people are holders of stocks, but all are sufferers; some in one way, and some in another. Of the losses sustained by depreciation of bank notes and bank deposits we have seen no estimate. The aggregate must be enormous, but it is divided among a great number, and as part of the loss is suffered on one day, and part on another, the people are able to bear up under it. A direct tax of half the amount, would have caused a rebellion.
In another part of this number, pages 281-3, will be found a report of part of the debate in Congress in 1816, on the subject of incorporating a Bank of the United States. The remarks of the speakers, especially those of Mr. Webster, Mr. Randolph, Mr. Mason, and Mr. Wells, are well deserving of attention, for they show the nature of the principles of the system.
Mr. Jeremiah Mason, the Senator from New Hampshire, who so zealously opposed the establishment of the U.S. Bank, was, about the year 1828, appointed President of the branch at Portsmouth, and by attempting to make that sound which had been rotten from the beginning, brought on himself the animosity of men of both of the political parties of the day. They endeavored, through the influence of some gentlemen in Washington, to have him removed from his station; but did not succeed in the attempt. To the failure to remove Mr. Mason, Mr. Nicholas Biddle has attributed General Jackson's animosity to the Bank of the United States; but very unjustly. There is abundant evidence that General Jackson was long before opposed to a National Bank.
It is well to connect different parts of history together. And the reader will read Mr. Mason's remarks in opposition to the establishment of the Bank of the United States with the more interest, when he learns that it is the Mr. Mason whose name has been so often referred to in the political disputes relating to the re-charter of the Bank. The chapters which follow, pages 283-8, exhibit the operations of the United States Bank during the first years of its existence. To the thinking man they will afford ample food for reflection.
Several suits have been recently instituted in this city to recover large sums paid in usury to bank directors, who granted the plaintiffs the favor of shaving their notes at the rate of thirty, forty, or fifty per cent. We cannot commend the morality of such proceedings, though very desirous of seeing punishment inflicted on those who thus abuse an important public trust, and prey upon a community which they were appointed to assist. But the fact shows the beauties of our banking system, and confirms all that we have said of it for several years past. The facts are the following. A merchant applies to a bank for a discount. The cashier or president, or a director, tells him that the bank has no money. In despair he goes to a broker, who shaves his note, and gives him a check for the proceeds upon the very bank which had refused to discount his note, under the pretence of having no money. But the bank had money enough, and loaned it to the directors, one of whom employs a broker to shave the very note which was thus driven out of the bank. Such has been the course of our banks from 1836 to the present time; and how much older this course is we cannot say. --Ledger.
It has been their course ever since they have been established, whenever the market rate of interest has exceeded the bank rate; and must, from the nature of things, be their course, so long as the present system of banking continues.
The LaFayette Bank, a safety fund bank in the city of New York, has failed.
The Bank of Hamilton, Butler County, Ohio, and the Bank of Chillicothe, have made assignments; and it is said that the Bank of Cleveland, and the Commercial Bank of Lake Erie at Cleveland, the Banks of Xenia and Marietta, and the Commercial Bank of Scioto, at Portsmouth, all in the State of Ohio, have done, or are preparing to do likewise. According to other statements, the Banks of Marietta and Xenia, and the Commercial Bank at Portsmouth, mean to resume specie payments.
It is said the deficiency in the funds of the Penn Township Bank amounts to about 260,000 dollars -- a pretty large sum for a bank having a capital of only $500,000. According to a statement we have heard, certain country banks having dealings with the Penn Township Bank, deposited with it bonds and mortgages, and other valuables, as collateral security. These the late Cashier took, and disposed of in the market, in order to acquire the means of carrying on the speculations of himself and friends. No doubt he meant to return the amount faithfully. But one of the country banks wished to redeem some of the securities it had pledged with the Penn Township Bank. They were not forthcoming, and this was what first led the Directors to investigate the manner in which the late Cashier was conducting the affairs of their institution.
If there is any thing erroneous in this statement, we shall be happy to have the means of correcting it in our next number.
Mr. John G. Boyd, who was formerly Cashier of the Towanda Bank, shot himself in this city, on the 19th ult. The immediate cause was his inability to give the Penn Township Bank security in the amount of about 60,000 dollars, on account of some claims it had against him.
From some incidents in the early history of Mr. Boyd, which have accidentally come to our knowledge, we think it likely that under any circumstances, and under all circumstances, he would have been a schemer, though without the agency of paper money banking, his ability for scheming would never have been fully developed. He was, when a youth, an apprentice to Mr. Bethuel Moore, a respectable house carpenter of Philadelphia. From him he ran away; and we next hear of him at New Orleans. There he made contracts with certain gentlemen to erect houses for them, obtained advances from them, and left New Orleans without fulfilling his contracts.
Some two or three years since he engaged in the lumber and iron business, in Tioga County, Pennsylvania. This led to dealings between him and the banks at Williamsport and Towanda. He financiered so well, as to be made agent of, and finally Cashier of the Towanda Bank.
As agent and cashier of the bank, he had opportunities of applying its funds to the promotion of his own speculations, of which opportunities he took advantage.
It would be tedious to relate all his "operations." Let one suffice. As agent for the Towanda Bank, he induced the engravers here to alter its plate for its "relief notes," so as to adapt them to the signature of a "Clerk" instead of a "Cashier and President." And without any authority from the bank, as is alleged, he put into circulation a large amount of these notes, signed by himself as Clerk. Notes of this description, to the amount of many thousand dollars, are said to be now in possession of the city brokers.
As he made his money easy, he spent it freely. He was particularly liberal to a family, one of whose members he had deceived into a false marriage with himself. On one occasion he gave to each of them, as a Christmas present, the sum of five hundred dollars; and bestowed on them, in all, it is said, not less than twenty or thirty thousand dollars.
One of the reasons he gave for shooting himself was, that "he could not bear to be disgraced." --He could commit crimes of the deepest turpitude, without any feelings of compunction, but he could not bear to be found out.
His case certainly affords a remarkable evidence of the admirable adaptation of paper money banking for developing talents of a particular order. --Without it, a poor ten thousand dollars would probably have covered the whole amount of his scheming.
The United States Bank.
The stockholders of this institution met, pursuant to adjournment, on the 21st of February. Their proceedings were very boisterous.
Mr. Josiah Randall wished certain of the assignments made by the bank set aside, and others made instead, in conformity with the Act of Assembly. Mr. Gibbons thought "Old Nick" had something to do with this movement.
The meeting sided with Mr. Gibbons, and then adjourned. But Mr. Randall and his party tarried behind, and resolved to call another meeting, to be held on the second Thursday in April next.
Mr. S. Jaudon and Mr. T. Dunlap, two of the persons who had been bound over by Recorder Vaux, to answer a charge of conspiracy to defraud the stockholders of the U.S. Bank, have been discharged by Judge A. Randell. Their case was brought before him on a writ of habeas corpus.
State of Trade.
This is duller than it has been at any previous period in Philadelphia since the commencement of our Journal. This is but the natural consequence of causes that have long been in operation, but some of the effects of which are just now beginning fully to develope themselves.
One of the immediate causes of the present depression, is to be found in the state of the currency of the western and south western States. The notes of the banks in several of them are of such uncertain value, that they will no longer serve as substitutes for bills of exchange. Remittances to our merchants are consequently few and far between.
Another cause of the dullness of trade is to be found in the condition of our own currency. This is composed of constituents of three different values. For small change, we have silver coin, "shinplasters" being abhorred by us as nuisances. For transactions amounting to a dollar, and not more than five or ten dollars, our currency consists principally of "Relief notes," or, as we have heard them not inappropriately called, "Distress notes." Many of these are 12 or 15 per cent. below bank par. Some of the retailers refuse the country notes of this description altogether. Others take them, on condition of not being required to give silver change. Others, when a dollar note of this kind is offered to them, will take it, if those who make the offer, will buy 50 or 75 cents worth of goods.
For wholesale transactions our currency consists of bank checks marked "good," and bank par is five per cent. below specie par.
This state of things cannot last long. As the wholesale dealers refuse to receive country "Relief notes" from the retailers, the "Relief," or "Distress notes," must soon become merely brokers' merchandize.