The Journal of Banking
by William M. Gouge,
It is a point very generally assumed by the friends of the present banking system, and sometimes tacitly admitted by some of its opponents, that so long as the banks promptly redeem their issues on demand, the amount of currency is the same as it would be if we had only a metallic medium, and that prices are consequently the same as they would be if our money consisted exclusively of gold and silver coin; or, that if they ever differ from this scale, it is only in a slight degree, and for a short period. In other words, they assume as a fact that the bank notes which then circulate merely displace an equal amount of gold and silver currency.
It is a very convenient assumption for them, but it is entirely a gratuitous one. Yet it is a position of so much importance that its truth ought not to be taken for granted. It is certainly assuming a great deal, to assume that two kinds of money, so very different from one another as coin and paper, will be the same in their volume. --They differ both in the cause of their value, and in the nature of their value. The value of the one is intrinsic, or inherent in its very substance. The value of the other is adscititious, being dependent entirely on an opinion that something possessing inherent value can be got in exchange for it. Paper money is merely the representative of a debt due by the issuer to the holder. Gold and silver may be said to represent the labor and the capital which have been employed in producing them. The quantity of paper money may be suddenly increased or diminished in a large amount. The quantity of gold and silver cannot suddenly be either greatly diminished or greatly augmented.
It is, we repeat it, assuming a great deal to take for granted that prices are the same when the currency consists of "convertible paper," as they would be if the currency consisted exclusively of gold and silver money. It is a position which ought to be proved, if it can be proved. --But it never yet has been proved. And we defy the friends of the present banking system to prove it.
In 1830, the issues of the banks amounted to 61 millions of dollars; in 1834 to 94 millions; in 1835 to 103 millions; in 1836 to 140 millions; and in the beginning of 1837 to 149 millions. --During all this time the banks were paying specie. In the short period of six years, the circulation was more than doubled. Is it possible to conceive that such an augmentation would have taken place if our currency had consisted exclusively of gold and silver ? According to Jacobs, the whole quantity of the precious metals in the world is equal to ten thousand million dollars. According to Gallatin, the mines when most productive yield about fifty millions a year. The annual supply is to the stock on hand equal to one-half per cent. How then would it be possible for gold end silver money to fluctuate as "convertible paper" fluctuates ?
Take again the circulation of the banks in the State of New-York, since they resumed specie payments. On the 1st of January, 1839, the aggregate circulation was 21,873,149: in 1840, 16,372,592: in 1841, 20,588,123: in 1842, 12,100,000. In one year we find the currency increasing, at the rate of 25 per cent.; and in the next decreasing at the rate of 40 per cent. Facts like these overthrow the very basis of the theory of "convertible paper."
The notion that the foreign exchanges will regulate such paper so as to give it the stability of a hard money currency, is altogether fallacious. It is necessary, indeed, for the bankers to watch the course of foreign exchanges, as otherwise they would not know when to save themselves by ruining the community. But experience has shown that there may be a very great inflation of the currency, and a very small rise in foreign exchanges.
During the great panic in England in 1825, exchanges were steadily in favor of great Britain: and during the great expansion which preceded the panic, they were never more than a fraction of one per cent. against London, and in favor of Paris.
At New-York and Philadelphia, during the years 1830, 1834, l835, and 1836, the foreign exchanges were generally in favor of this country, and were at no one time more than one per cent. in favor of London, taking the true par as the basis of the calculation.
These facts show conclusively that there may be an enormous inflation of a "convertible paper" currency, which will evince itself neither by a premium in specie, nor by a permanently high rate of foreign exchanges, but simply by a rise in the price of commodities.
"The currency of a country," says Mr. Gallatin, "is the common standard by which the value of all the other commodities is estimated, and every contract is performed. Whatever commodity or species of paper may by law or general consent, be universally received in any country in exchange of every other commodity, and in payment of all debts, is the circulating medium of the country."
Bank notes constitute our standard and currency, and this is true whether the banks sustain or suspend specie payments. In either case, gold and silver coin are with us mere merchandize, or at best but a subsidiary currency. They are used only in retail transactions, for occasional payment of bank balances, and for payment of balances to foreign nations.
It ought not to be so; but it is so. The banks by their issues determine the prices of all commodities, and among others of the precious metals. We buy gold and silver with bank notes, just as we buy copper and iron.
So long as the banks pay specie, they keep two commodities, namely, gold and silver at fixed rates as compared with paper money, but cause all other commodities to fluctuate in price to a most ruinous extent. When the banks suspend, they cause gold and silver to fluctuate in paper currency price more than any other articles of traffic.
It is sometimes argued that when the banks suspend specie payments, they cause an immediate loss to the community equal to the premium which is then demanded for specie, or, if you will, the discount on bank notes as estimated in specie; so that, if the paper in circulation amounts to one hundred million dollars, and the discount on bank paper is ten per cent., the loss to the community is equal to ten millions of dollars. This is not true. Banks, by suspending specie payments, do immense evil, but not in this way. It is generally found immediately after a suspension of specie payments, that most commodities cam be purchased with bank paper as advantageously as they could before. Goldsmiths, silversmiths, and others whose business or inclination induces them to purchase specie, lose immediately by bank suspensions, but not the community generally. The sufferings of the community come afterwards, and in another way.
There is a particular relationship between bank paper and specie; but bank paper, in even the best of times, cannot, with propriety, be said to be founded on specie, nor will specie payments by the banks give to their paper that stability of value which every currency ought to possess. The paper currency of Great Britain may be said to be founded on wheat, or corn, as the English call it, and that of the United States on cotton, rather than on specie. The extent to which the banks of Great Britain can, in ordinary times, expand, depends on what that country has to buy abroad. --The extent to which the banks of the United States can expand, depends on the amount which we are able to sell abroad, added to the amount which we are able to borrow abroad.
A bad harvest in England, by compelling the English to send gold to the continent to buy corn, always causes their paper money banks to contract their circulation. A good harvest, on the contrary, enables them to expand. Thus it is the state of their corn crop that primarily regulates the issues of their banks.
So in the United States, the extent to which the banks can expand, depends on the amount we can tell abroad, added to the amount we can run in debt abroad. Suppose, for example, the value of our exports be suddenly doubled or trebled in the foreign markets to which they are sent. Then what in ordinary times yields us but one hundred million dollars, would yield two or three hundred millions. It is plain that in such a state of things, exchanges would be greatly in our favor, and that the banks could for a time increase their issues enormously, and raise prices accordingly. It in equally plain that the same effect will be produced, if we can run in debt abroad to the amount of one or two hundred millions. Under such circumstances, though prices may be very high and imports enormous, there will be little or no demand for specie for exportation, because our credits abroad will satisfy all demands against us.
What is here supposed to occur, is what actually did occur between 1830 and 1836. Cotton, which was, according to the Treasury Reports, of the average value of only 9½ cents a pound, in 1831, continued to advance, notwithstanding a great increase in the production of the article, till 1836, when it reached the price of 16½ cents. According to the same Reports, the value of the cotton exported, which was in 1831 less than 26 million dollars, increased in 1832 to 32 millions; in 1833, to 35 millions; in 1834, to 50 millions; in 1835, to 82 millions; and in 1836, to 68 millions. This, of course, afforded our banks an ample fund of foreign exchanges, which was further increased by the sale of stocks in Europe, and the open credits then granted to American houses.
If we look into the condition of things on the other side of the Atlantic, we find that a succession of good harvests in England, enabled the banks there greatly to increase their issues, thus raising the price of our cotton, and causing an extension of the credit system in all its forms.
These truths show that there may be an enormous inflation of a "convertible paper" currency, which will evince itself neither in a premium on specie, nor a rise in the rate of foreign exchanges, but simply in the advanced price of commodities.
In sober truth, specie plays a very inferior part in our bank currency system. It comes in as only a secondary regulator, and does not begin to act on the mass of the paper currency till the mischief is done, --that is, till the expansion has proceeded so far as to involve the whole community in the wildest schemes of speculation.
By paying specie, the banks do indeed fix the money rate of foreign bills of exchange, so that the premium cannot, in ordinary circumstances, and for any length of time, exceed the cost of transporting specie from one country to another, including in that cost, freight, interest, insurance, and charges of every description. We accordingly find that for a series of years, embracing periods of both expansions and contractions, the whole extent of fluctuation in the rate of exchange between London and Paris, did not exceed 1½ per cent. This includes both discount and premium.
Regulating, in this way, the money rate of foreign bills of exchange is, however, a very different thing from regulating a mixed currency in such a way that the total amount shall be exactly and constantly equal to the gold and silver which would circulate if there were no paper issues. --This the banks cannot do by the simple act of paying specie for their notes. The necessity of paying specie does, indeed, fix a limit on their issues; but this limit varies with every change that occurs in the commercial world, and in the state of public credit. Under certain circumstances, our banks may issue paper to the amount of one hundred and fifty millions, and yet continue to pay specie. Under other circumstances, they may find it difficult to sustain specie payments, though the paper in circulation may be reduced to one hundred, or even seventy-five millions.
It is a beautiful system, truly: and one well worthy of the support of the sages and patriots of America.
We are indebted to the Petersburg Statesman for the following extract from an old author, giving an account of a commercial medium which was in use in Virginia about the year 1779.
The principal trade of Petersburg arises from the exporting of tobacco, deposited in warehouses and magazines; but before it is lodged in these warehouses, it is examined, to confirm it is a proper state for exportation, by inspectors, who prove the quality of the tobacco; and if found good, they give the planter a receipt for such a quantity, and these receipts pass current as cash: thus, any one depositing tobacco in these warehouses, and obtaining a receipt, may go to Williamsburg, or any other city in the province, and purchase any kind of commodities, paying with receipts, which circulate through a multitude of hands before they come to the merchant who purchases the tobacco for exportation: thus this valuable commodity is equally bank stock and current coin; and the inhabitants in describing the prices of their different purchases, instead of saying, "I gave so many pounds [sterling] for such an article," say, "I gave so many hogsheads of tobacco."
We regard these certificates as far superior to the paper money now in use. There was no deception in them. They were representatives of a commodity having intrinsic value. They were bona fide bills of exchange, redeemable not in gold or silver, but in another commodity having inherent value. And every man who had one of these certificates, knew in what manner it was ultimately to be redeemed, and that there was a sufficient fund provided for its redemption. The language in use, --"I gave so many hogsheads of tobacco for such an article," shows that the character of the medium was understood by those who used it. It did not, like our present medium, utterly destroy, in many minds, the distinction between cash and credit, promise and payment, metal and paper.
Biddle on Banking.
In the latter part of the present number, pages 379 and 380 [not available in this copy], will be found a very lucid exposition from the pen of Mr. Nicholas Biddle, of the effect which bank expansions and bank contractions, have on prices, and also on the export and imports of commodities in general, and of specie in particular.
One passage in this essay struck us with particular force when we last read it. It is the following:--
"If a bank lends its money on mortgages, or stocks -- for long terms, and to persons careless of protests, it incurs this great risk, that, on the one hand, its notes are payable on demand, while on the other, its debts cannot be called in without great delay -- a delay fatal to its credit and character. * * * * A well managed bank has its funds mainly in short loans to persons in business, -- the result of business transactions -- payable on a day named."
Mr. Biddle has the merit of having stated the truth on this point with great clearness, and of having illustrated it, by acting in direct opposition to it. This was the necessary effect of his connection with stock jobbers and politicians.
From the Petersburg, (Va) Statesman.
Bank Paper Money.
The United States Constitution provides that no State shall "coin money." Can then a State which is prohibited from coining gold and silver money, establish corporations with authority to make promises equivalent to money ?
The U.S. Constitution provides that no State shell emit bills of credit. Can then any State establish a corporation with power to issue bills of credit ? Can a State borrow such bills ? And if the notes of banks are not bills of credit, pray what are they ?
Judge Story says, that "The bills of credit of Connecticut, passed before the Revolution, were of the same general character and operation." --The act of 24th George II, uses language, that shows "bills of credit" to be a phrase constantly used and understood as equivalent to paper money. Judge Story states, that "to emit bills of credit, conveys to the mind the idea of issuing paper, intended to circulate through the community, for its ordinary purposes, as money, which paper is redeemable at a future day."
Judge Kent, in his Commentaries, defines a State bill of credit to be paper issued by a State Government, and intended to circulate through the country for its ordinary purposes, as money redeemable at a future day.
Again-- the U.S. Constitution provides, that no State shall make any thing but gold or silver coin a tender in payment of debts.
Then can a State rightfully establish banks with power to issue paper money --to banish the specie from the State, or lock it up in the vaults of the bank ? Shall the U.S. Constitution compel every man, when required, to tender gold or silver coin in payment of his debts, and yet the State have authority, by means of banks, to expel or lock up all the gold and silver coin ? Do not the banks, in practice, by the issue of their money, render impracticable the tender of specie ? Is not then this clause of the United States' Constitution (the supreme law of the land) rendered null and void by bank paper ? Can banks be constitutional or expedient when their inevitable operation is to repeal a clause in the United States Constitution ?
Should a State undertake to coin gold and silver, the whole world would admit that that was unconstitutional. Suppose, then, instead of coining gold and silver, the States should coin pewter, and by statute give it the value of money; passing off the pewter for silver and gold; is it conceivable that this proceeding would not be contrary to the United States Constitution ? In other words, would the coining by a State of gold and silver money be unconstitutional, and yet the absolute counterfeiting of the coin of the Union be constitutional ? Is making good money by a State a crime, and uttering counterfeit money no offence ?
But, if the coining of pewter be incompetible with the constitution, how can the substitution of paper be compatible with it ? Who will deny that a large portion of the paper currency of the United States is of as little value as pewter coin ? Why is it that a State may give statutory value to a bit of stamped paper, and not to a bit of pewter ?
The U.S. Constitution gives to Congress the exclusive power to coin money; the State banks issue paper money and banish the coin. Is it conceivable that the wise men who framed the constitution could have intended to give Congress an exclusive power, and yet clothe them with no remedial measure of securing that exclusiveness ! --Did they mean to give to one Congress the sole power of coining money, and yet invest that body with no power to prevent twenty-six several States from indirectly usurping and absolutely defeating the power ?
From the Charleston Mercury.
Specie as Currency.
The old Merchants of Charleston speak with enthusiasm of the noble trade of this city thirty and forty years ago --before the establishment of the bank dynasty in the country-- when we had a direct trade with many nations -- when payments were made mostly in gold and silver -- when Merchants themselves poured their surplus resources into each others' hands with the freedom and confidence of brothers -- when bad faith was as little suspected as it was rarely practiced. --Those who have dealt with the Merchants of Cuba give the same account of the prompt payments, confiding trust, and sterling honesty that characterise the course of business there. The curious science of checks and balances --stately rows of books "by double and single entry"-- that vast complicate web spun about the circle of business to prevent sharpers from preying on each other, is little known in those regions, where men buy only what they can pay for, and are careful to pay for what they buy.
In the system under which we now live our currency is a vast debt of the banks --our capital a still greater debt to the banks-- our retail trade another to wholesale capital -- our meat, drink, and clothes, a debt to the retail trade. We are wound up, intercogged and hooked in by a system of debt and credit, overlaced, underlaced, network, crosswork, binders, braces, and all conceivable sorts of intertwistifications, till we resemble very much one of those bewildering mazes of machinery that have grown up under the crazy dream of making "perpetual motion" -- and with much the same object and success, too -- for our whole system is founded on the universal desire to live and get rich without capital, without economy, and without toil -- and the result, as in the case of the said perpetual motion, is that when we are just on the point of bringing our scheme to perfection, it is sure to stop with a crash, and the whole to tumble about our ears. A crazy chemist in one of Boz's whimsical tales, complaining of the same malice of fate, says "the Philosopher's Stone would have been discovered a thousand times, if it had not been for the remarkable fact that the crucible is sure to blow up just at the very moment when the grand result was about to be realized." Our system is such that if a single wheel break, the whole stops, or rushes off in a terrible rattle and crash -- the protest of a note may set the whole world in an uproar -- the bankruptcy of a broker may produce all the dismay and confusion of an earthquake. In our states of "high prosperity," we have been compared to an inflated balloon -- stick a pin in it and the whole goes off in a whizz and a crack and a sputter, leaving nothing but emptiness and collapse, in place of the round, elastic air-ship that could shoot into the clouds and outstrip the bird of Jove.
Bubble Blowing.by Thomas Moore
Come with me, and we will blow
Lots of bubbles, as we go;
Bubbles, bright as ever Hope
Drew from fancy--or from soap;
Bright as e'er thP South Sea sent
From its frothy element !
Come with me, and we will blow
Lots of bubbles, as we go.
Puff the bubbles high in air,
Puff them well to keep them there.
See! but hark, your time is out
Now, like some great water spouts
Scattered by the cannon's thunder,
Burst ye bubbles, all asunder.
Buenos Ayres offers, at this time, the rarest inducements for emigrating financiers of any place on the map of the world. Indeed, we doubt whether, since the days of the South Sea Bubble, or John Law's Mississippi scheme, any place has enjoyed so near the perfection of banking and paper money prosperity as this place. A cartman charges one hundred paper dollars for hauling a load within the corporation; wheat is selling at $190 to $200 per fanega, (about 3½ bushels) and bran $120 for the same quantity. The cartage of water from the river to the heart of the city --a distance of a few hundred yards-- is worth $45 to $50 per load. Tomatoes sell for $1 each. Spanish doubloons are worth $296. If this is not a place where paper money patriots can flourish, the history of the world never afforded one. For the last five hundred years there has not been such a chance. Shipping Company and Brandon would pass currently, Railroad and Union would be at a large premium, and Blue Blacks, Planters and Agricultural would be considered crown jewels. --Free Trader.
In Sumpter county, the records of the court have been stolen and burned; the Deputy Sheriff kidnapped, and sales of property by the Sheriff forcibly prevented.
"The people," say, an eye witness, "were harangued by some man, whom I could not see, forewarning persons not to bid for property. It is impossible to tell how many were determined to prevent a sale --unless to suppose that a majority acquiesced in it. One man I saw, who, with a most barbarous look and gesture, absolutely forbade any bidding whatever. I knew him not, but I never shall forget his visage. A mad wild-cat could not have looked more demon-like, --his teeth gritted as he spoke, and he shook his head and threatened that the man who dared to bid should be well mobbed. The man was a stranger to me. I was interested in the Sheriff's sale, but felt that if I bid, it would be at the peril of my life. Some eight or ten stood round as spokesmen, and as the Sheriff would offer an article of property for sale, they would say "no bid." So that out of an advertisement of two or three columns in a newspaper, the Sheriff sold but two tracts of land --one for five dollars and the other for fifty, which was permitted, as it was only to perfect titles."
Such are the consequences of involving people in debt, through the paper money system.
In August, it is said, about two million acres of land in this State, will be sold for the taxes.
The Governor has issued his proclamation calling upon the holders of a five million loan of this State to return $2,657,039.76 of its bonds, that being the amount of damages sustained from the failure of the contracting parties with which the loan was negociated; or to return the whole amount, and receive new bonds for the balance. $2342,960.24 --in which case they shall receive in payment, at their option, and the consent of the Legislature, any portion of the public works at cost or a fair valuation, or a portion of the public domain ceded by the General Government to Michigan.
The offinces of the Circuit and County Court Clerks of McMinn County, in this State, were entered on the 8th of May, and all the books and papers belonging to the Circuit Court were burned.
The history of paper-money banking is, from beginning to end, nothing but a history of folly and wickedness; but there is nothing in it which, for downright stupidity, equals our late resumption movement in Pennsylvania. After a covenant had been made with the banks, allowing them to violate with impunity all their obligations, they were suddenly called on to resume specie payments, without allowing them time even to settle the balances due by one to another. The consequence is that some have resumed, and some have not resumed; and the loss which the citizens of the State have in various ways sustained through the legislation of the last session, cannot be estimated at less than five million dollars.
The Legislature meet again in June, and then if the people escape with a loss of ten millions, they may think themselves happy. The State is in reality bankrupt, but neither the Governor nor the Legislature seem to be aware of the fact; and the ways and means they resort to, are such as have a tendency to increase the difficulties of both the State and the people.
Is this owing to simple stupidity ? Some think not, and affirm that it is owing to stupidity on the part of some of the actors, and wickedness on the part of others. Our internal improvement system seems to be almost as corrupt and corrupting as our banking system. The jobbing and the favoritism it gives rise to, and the manner in which it increases Executive influence, make some Pennsylvanians almost regret that rail roads and canals were ever invented.
It is to this jobbing interest, it is said, that we owe the resumption movement, which was intended, not in reality to bring about a resumption of specie payments, but to coerce the banks into the issue of another batch of relief notes for the benefit of the jobbers. If so, there was wickedness as well as stupidity in the movement, and the manner in which it has reacted on those most deeply concerned in it, is hardly to be regretted. But for the condition of things in Pennsylvania, we might hope for a speedy restoration of at least an appearance of prosperity throughout the country. But Pennsylvania is the Keystone State. --Its fiscal and monetary affairs are in a deplorable condition, and the Legislature holds two sessions a year to make them worse.
In this State, the effects of the bank revulsion appear to be very sensibly felt. The inhabitants of Bedford County, assembled in public meeting, declare that "the people of this county and commonwealth, are now laboring under great pecuniary embarrassment, such as the oldest citizens have never before witnessed." The inhabitants of Owen County, say "that the pecuniary condition of the country requires immediate legislative intercession to preserve from utter ruin thousands of meritorious and worthy and honest citizens." Other county meetings have made similar declarations.
The sufferers propose that relief shall be afforded by the establishment of a Citizens' Bank with branches ! They seem to forget that the Government of Kentucky has sunk all its capital and all its credit in unproductive rail-roads and canals, and in the stock of the present chartered banks.
Levis, the ex-cashier of the Schuylkill Bank, is at present in Philadelphia; and as all legal restraints on him as a witness have been removed, it is expected that he will make some interesting disclosures.
According to an article in one of the daily papers, Levis was a mere agent of the Schuylkill bank in the issue of the spurious stock of the Bank of Kentucky. When the Philadelphia banks resolved, in June 1833, to resume specie payments on the 13th of August following, the Schuylkill Bank was deeply in debt to the others. As "failure or financiering was the alternative, a suggestion was made for raising $150,000 in New-York, on a pledge of Kentucky Bank stock at four months. Accordingly, an over issue was made in July, 1838, upon which were obtained $100,000. This process was continued till the debt to the other banks was reduced from $500,000 to about $120,000, all of which was due to the Bank of the United States, which agreed to give time for collecting the amount from the debtors of the Schuylkill Bank. At this time it was believed, in the Schuylkill Bank, that the United States Bank, and some of the other large banks intended to extend their issues, and that the result would be an abundance of money. But as these banks were obliged to curtail instead of extending, and as the United States Bank pressed the Schuylkill Bank for its balance, the latter 'felt the necessity' of issuing more stock of the Kentucky Bank."
There is nothing incredible in this story. -- "Skin for skin," saith Satan, "all that a man hath will he give for his life;" and we must expect a bank to give as much to preserve its existence. --There is a President, a Cashier, and twelve Directors, and the responsibility when divided among them becomes so small, that it is to each as nothing. And then, some of the parties concerned, need know nothing about it: or if they do know, they need not appear to know. &c., &c.
But while certain persons were doing so much for the Schuylkill Bank, did they do nothing for themselves ? The receipts Levis has to show, do not appear to amount in all to more than 500,000 dollars, while the losses which the Bank of Kentucky has sustained through its Philadelphia agency, are said to be in the aggregate, $1,300,000. What went with the rest of the money ?
Farrington, the late President of the Gallipolis Bank, has been sentenced to six years imprisonment in the Ohio Penitentiary.
"We are informed," says the Indiana State Sentinel, "that R.A. Mullikin, late cashier of the Lafayette branch of the State Bank of Indiana, is a defaulter to the amount of one thousand dollars. The Branch, it is said, has no remedy upon his securities; as he got his official bond in some way from the President of the branch, and has gone to parts unknown."
The cashier of one of the branches of the Planters' Bank of Tennessee, is said to be a defaulter to the amount of 20,000 dollars.
"We are informed," says the New-Orleans Advertiser, "that the Branch Bank of Louisiana, at St. Francisville, has been robbed of some eighty thousand dollars or more. The cashier, it seems, allowed persons to overdraw: at least, so goes the story. He has been dismissed, it is said, from the employ of the Branch."