The Journal of Banking
by William M. Gouge,
We are friendly to "free banking;" --that is to say, we are friendly to a system in which every man should be at liberty to receive money on deposit, discount notes, and deal in exchanges, subject to the same responsibilities, and enjoying the same rights as persons engaged in other branches of business.
But we are not friendly to a system in which every man should be at liberty to issue notes to pass as money. Between lending money and making money -- between free banking and free coining, there is no necessary connection. The private bankers of London, Liverpool, and Manchester, who do a business far exceeding in amount that done by the incorporated banks of New-York, Philadelphia, and Baltimore, issue no notes of their own as a circulating medium.
There are, however, gentlemen who think that all the evils the paper money system produces, are owing to the restrictions imposed upon it, or to its being carried on by corporations instead of individuals; and that if every body were at liberty to manufacture money out of rags, free competition among the rag money manufacturers would produce the same beneficial effects as free competition in the making of cloth or the raising of corn.
They forget that free competition in agriculture, the mechanic arts, and the legitimate branches of commerce, is a competition of labor and capital, while free competition in paper money banking would be little more than a competition of cunning.
They forget, moreover, that free competition in most pursuits is advantageous, because it cheapens commodities; but that free competition in making money, can cheapen money in no other way than by deteriorating its quality.
And lastly, they forget that free competition in most other businesses, is a competition in producing things that are essentially good: while free competition in producing paper money, is a competition in producing that which is essentially evil.
The arguments that are used by the friends of "free banking" have sometimes considerable plausibility, but they owe their plausibility entirely to their authors not distinguishing properly between the functions of money as a mere circulating medium, and money as a standard and measure of value; and to their confounding two things so essentially distinct as currency and obligations to pay in currency. It is astonishing to us that any man of general reading should confound the bank note with the bill of exchange or other business note, after the difference between them has been so clearly pointed out by Storch in his Course of Political Economy, and subsequently by Mr. Gallatin. Yet this is frequently done by men from whom better things might be expected. Because every man ought to be at liberty to enter into obligations to pay in currency, they infer that every man ought to be at liberty to create currency !
"Banking," say they, "is a natural right, in the free exercise of which every man may luxuriate, till society, finding this luxuriance injurious to itself, chooses to impose such restrictions on it as may protect it from depredation." We do not admit this so called "natural right," if under it be included the liberty of creating money for the community, out of rags and lamp-black, or out of nothing. It would be quite as reasonable for every man to claim as "a natural right," the liberty of fixing the standards and measures of weight, length, and capacity, and of varying them as often as might suit his own fancy, or rather, his own interest.
Of stability of value in the currency of a country, these advocates of "free banking" seem to think but little. Every desirable object, if we may believe them, will be attained, if only the note-holder can be sure of receiving payment in specie whenever he may choose to demand it. --To us this appears to be an inferior consideration. If every bank note at present in existence in Great Britain and America should prove a dead loss in the hands of the holders, the evil thereby produced would be small compared with that occasioned by the use of those deceptive measures of value which cause men to place a false estimate on every thing.
But the note holder would have no such security. Because, when notes pass as money, few take the trouble to inquire whether they will ultimately be paid. The only inquiry each then makes, is, "Can I pass them away to some one else ?" And as every one would hasten to get rid of those notes first of which he had the most suspicion, the notes of those private bankers whose credit was of the most doubtful character, would be likely to obtain the widest circulation. At least, such notes would, through cunning and contrivance, take the place to a great extent of those issued by the most responsible persons. "Numberless instances," says the Edinburg Review, "have occurred in the history of private banking within the last few years, in which the notes of individuals, without any real capital, and who were from the beginning in a state of insolvency, have continued to circulate for a long period in company with those of the best established houses, and to enjoy an equal degree of credit."
We had in Philadelphia, not long since, a beautiful illustration of the principle of "free banking," or rather of "free coining." Dr. Thomas W. Dyott's standing was such that he could not borrow from moneyed men, except by involving all his possessions, real and personal, in inextricable embarrassment: and yet Dr. Thomas W. Dyott's bank notes had free circulation among us. Why were people so cautious about receiving Dr. Dyott's notes of hand ? Because the inquiry concerning them was, "Will they be paid ?" Why were they so ready to receive Dr. Dyott's bank notes ? Because the only inquiry concerning them was, "Can we pass them away?" Only give a man's paper a circulating form, and his credit must be very low indeed, if it does not obtain some currency. So great is the desire of men to possess money that they will grasp with avidity at almost every thing which has the form of money.
McCulloch, of Edinburg, one of the most eminent of the Political Economists of the day, has had ample opportunities of observing the operations of "free banking." His opinion of it is by no means equivocal. It is simply "Free Banking is Free Swindling."
The advocates of such a system in this country admit that at its commencement great frauds would be perpetrated under it, and great losses sustained through it, but they seem to think that in time the people would learn what money-makers it would be safe to trust. This is supposing that the two races of knaves and dupes will in time become extinct --a supposition that neither past nor present experience affords us any warrant for entertaining.
But suppose all our "free bankers" were men of undoubted wealth ? Even then there would be insuperable objections to the system. Their notes payable on demand would circulate as do our present bank notes, and would become money to all intents and purposes: -- that is to say, would regulate prices, and be received as a full discharge of all ordinary debts and obligations. As the quantity of these notes increased, other things being the same, prices would rise. As the quantity decreased, other things being the same, prices would fall. And the causes of this increase and decrease would be much the same as at present, for our individual money-makers would be just as eager as are our corporate money-makers to engage in stock and land speculations.
Take, however, the most favorable view of the case. Suppose them to confine themselves to banking on strictly commercial principles. Suppose them to discount nothing but business paper, so that every bank note they issued should be the representative of real bills of exchange, and these, in their turn, the representatives of commodities in the were-houses of the merchants. What would then be the result ? News is received from abroad of a rise in the price of flour and of cotton. A speculative demand is thereby created for these articles, by which their prices are raised previous to any increase taking place in the amount of currency. This speculative demand leads to the creation of a large amount of new business paper. This is discounted by the bankers, and then prices undergo an additional rise, through the additions made to the currency. This leads to a new speculative demand, which causes the creation of more business paper, and this in its turn a fresh issue of bank notes: and thus things go on till prices are raised so high that neither flour nor cotton can be exported and sold abroad at a profit.
Nor is this all. Through the addition made to the currency by the discounting of the notes of the flour and cotton merchants, the price of every thing is artificially raised, and when the necessary reaction occurs, the whole community are made to suffer.
In England, every body living beyond a certain distance from London, has, for one hundred and fifty years, had the liberty to manufacture money out of paper. But free competition in the manufacture of this kind of money in England has never given stability of value to it, and money which has not steadiness of value, be that money paper or metal, does more harm than good to society.
In Scotland, also, this freedom of making money out of paper has been enjoyed nearly as long as in England: and the Scotch banking system may, in every thing except the issuing department, be regarded as perfect. Scotch banks seldom break, and yet few banks do more evil: because the very means they take to save themselves are what ruin the people. In the town of Dumfries, in the last five years, there have been four hundred bankruptcies. Paisley, Glasgow, and other places, have also suffered immensely.
Now, if a system of "free banking," or rather of "free coining," is productive of so much evil in a country where every thing is comparatively stable, and where it is directed by Scotch sagacity, guarded by Scotch prudence, and sustained by Scotch honesty, what can be expected from it, in a country like ours, where every thing is in a state of change, where the people are certainly not deficient in sagacity, but where little can be said in favor of the prudence and the honesty of such part of them at least as would be likely to engage in any new system of paper money banking ?
Away, then, with all schemes for issuing paper money, whether by Government, by corporations, or by individuals. Legitimate commerce wants them not. It creates its own medium. It imports gold and silver from abroad sufficient to effect all the payments it engages to make in gold and silver. It does, indeed, make free use of credit; but when it promises to pay, it fixes a definite time for payment, and the promise is followed by performance or protest. It has various ways of economising the precious metals, by means of bills of exchange, book entries, offices of deposit and transfer, checks, &c. &c. But in no case does it make the empty promise stand in place of the performance. Such an expedient is merely the invention of insolvent governments, scheming individuals, and monopolising corporations.
About the 18th of May, the banks of New-Orleans succeeded in the wonderful object of making two commodities, to wit, gold and silver, bear the same market value as bank paper, leaving land, labor, cotton, and every thing else to fluctuate to the ruinous extent in which, from the necessity of the case, they ever must fluctuate, as long as "convertible paper," or any other kind of paper money, continues in existence.
But there was another paper currency in New-Orleans, and this, during the period of the suspension, had been generally preferred, in retail transactions, to bank paper. It was a paper issued by the three municipal corporations, amounting, in all, to about one million dollars, and the whole of it in notes of small denominations. That, where there are two paper currencies, the raising of the value of the one, has a tendency to sink the value of the other, is well known to those who have studied the principles of the system. But the municipal money makers of New-Orleans were either ignorant of this truth, or disregarded it. Perhaps they thought that as the paper currencies or Philadelphia and Baltimore had been "purified" principally at the cost of the working-men and the small traders, the same good work could be effected in the same way in New-Orleans.
Be this as it may, they took no measures to support the market value of their trash currency, and on the resumption of specie payments by the banks, the notes of the first and second municipalities depreciated from 15 to 20 per cent., while those of the third ranged from 50 cents on the dollar to nothing. What followed shall be related in the words of an eye witness.
"The brokers, thinking it an excellent chance for an 'operation,' classed all the bills of the municipalities together, stuck up notices of 'no shin-plasters purchased here;' and by these and divers other ungodly tricks, which would have done honor to Wall street, succeeded in throwing discredit upon all municipality notes, so that they could buy up those of the first and second at 46 and 50 cents --thus making an immense profit at very little risk, as nobody seriously believes that the notes of these municipalities will not eventually be redeemed.
"This being the state of things, the fruiterers, haberdashers, and small dealers in general, itinerant and stationary -- a motley and indescribable crew of French, Spanish, Italian, Portuguese, Germans, and Jews of all nations, to the number of three or four thousand, started this morning for the Mayor's office where they called out his Honor and demanded the redemption of 'les billets des municipalities.' His Honor, who did not happen to have the change 'past him,' declined this opportunity of showing his public spirit, but told the mob that the story of the depreciation of their notes was a falsehood, and that they would all be redeemed in a few days. The crowd upon this left the Mayor's office; and being instigated by the devil, who sometimes delighteth to witness the destruction of his own works, proceeded in a body up Chartres street to Canal, yelling like ten thousand wild Indians. On the corner of Canal and Camp, (the latter being a continuation of Chartres) the mob commenced the work of destruction by completely gutting the exchange office of Messrs. Valentine & Williams, and carrying off all the money it contained, gold, silver, and paper, (even shinplasters) while the cry flew from rank to rank of the rioters, 'Aux arms! aux arms!' The citizens immediately ran to the Town Hall, where a magazine of arms and ammunition is constantly kept, and returning in a body, charged upon the rioters, who fled with the utmost precipitation. By this time the offices of Valentine & Williams, Raphael, Nance & Barker, four brokers' offices 'all in a row,' were completely and literally gutted. Nobody was seriously wounded in this most extraordinary emeule, and the civil authorities, aided by the citizens, succeeded in capturing some ten or twelve of the ringleaders, who are to have their examination to-morrow morning, and who will undoubtedly be committed for trial."
But the matter did not end here. The N.O. Advertiser states that "the military were under arms during the whole of Friday night, as the Mayor had positive information of the intention of the disaffected to get up a riot, and disturb the peace and property of the city. The firemen were armed and at their posts, and the strictest watch was kept in every part of the town. All passed off quietly.
"The break of morning (on the 22nd) found the beef and fish markets empty, and the vegetable market little more than half filled. People returned with empty baskets and angry faces. Groups of market sellers soon gathered among the meat shambles and discussed the subject of shinplasters. Placards in different languages were posted up, calling on all who were opposed to further taxation, to oppression, to shinplasters, &c., to assemble near the Place d'Armes, at one o'clock in the day, with the means in their hands to make due resistance, &c. &c. The military, which had been relieved at an early hour, were summoned to their posts again at 10 o'clock, and preparations were made to arrest every man who should assemble in accordance with the call of the placards. The discontents were evidently disconcerted in their plans, for no attempt was made to carry them out. In the afternoon the Mayor issued his proclamation, calling on all good citizens to rally in defence of the laws."
This was very well, but the Mayor and all others concerned, should recollect that there would have been no breach of the municipal laws on the part of these poor people if there had not first been a violation of the laws of natural justice on the part of those high in authority. "Generally speaking," says the N.O. Picayune, "the holders of these notes were men of small means, and the few dollars of Municipality money which they held, was their all."
The first and second Municipalities by taking measures to fund their outstanding issues, raised them at once to par, and this, no doubt, tended to calm the excitement. The notes of the third Municipality became utterly worthless.
The Bank Revulsion.
In every part of the country, this is producing its natural effects. Take the following newspaper paragraphs by way of example.
The Times.-- The Hartford (Conn.) Review states that within a very short time, there have been eight or ten failures of the most respectable business houses in that city, men whom every body thought good, and whose credit was supposed to be as sound as that of the Hartford Bank.
Jefferson County.-- A meeting of democratic citizens was held at Brookville on the 11th inst., and amongst the resolutions adopted was one soliciting the Legislature to pass a law, authorizing the suspension of the collecting of all debts for the term of one year from the first of July next. --Blairsville (Pa) Record.
The Sheriff of Estill county, on the meeting of the court recently, resigned his office, thereby causing the court to adjourn without doing any business, and this was done simply to protect the people against judgments being obtained at that court against them, as was done in Mississippi and Arkansas about two years ago ! --Ken. Yeoman.
A correspondent or the Zanesville (Ohio) Republican gives a statement from the schedule of property sold by the Sheriff of Muskingum county, within a few days past, and for which specie was required, that shows a pressure scarcely credible. A four horse wagon was sold at $5.50, hogs at 6½ cents each, horses at $3, colts at $2 to $3, cows at $1.50 to $2.00 ! The writer says:
"Besides these, there was a store of goods, said to have cost several hundred dollars, sold for, I think, less than twenty dollars; amongst which I recollect a barrel of Orleans sugar, about 260 lbs., sold for one dollar and fifty cents the barrel !
"I should, perhaps, state that the above sales were made at three different days, and in two or three different townships, and the result in each nearly the same. The horses were such as have heretofore sold for $50 to $75 each."
"In the midst of the confusion an incident occurred characteristic of the government and the people. A public notice was every where put up, stating that the vaults under the bank, containing the gold and silver bars were fire proof, and that the bank books were all removed in perfect safety."
In England, money was, at the date of the last advices, the 17th and 18th of May, very abundant with one class of traders, and very scarce with another. While good bills could be discounted at three per cent. per annum, numerous failures were taking place in the metropolis and the manufacturing towns. One of the heaviest houses in Manchester, stopped payment on the 14th.
The prospect of the crops was good.
Bank and Church.
The General Assembly of the Presbyterian Church (old school) has, as appears from a report made to it on the 3rd of June last, the following amounts invested in stock.
2 shares Bank of North America, $0,800.00
20 do. Philadelphia Bank, 2,000.00
115 do. Mechanics Bank of Philadelphia, 4,828.00
1 do. Bank of Pennsylvania, 400.00
11 do. Bank of United States, 1,100.00
45 do. North American Insurance Co., 450.00
2 do. Pennsylvania Insurance Co., 800.00
100 do. Planners' Bank of Mississippi, 11,077.62
200 do. Agricultural Bank of Mississippi, 23,701.76
10 do. Grand Gulf Bank of Mississippi, 992.00
150 do. Mer. & Mec. Bank of Wheeling, 15,025.00
250 do. Mer. & Man. Bank of Pittsburg, 14,302.00
200 do. Planters' Bank of Tennessee, 22,106.25
150 do. Union Bank of Tennessee, 15,262.50
100 do. Bank of Mobile, 11,027.50
100 do. Bank of Louisville, 10,526.25
10 do. Chel. & Willow Gr. Turnp. Co., 1,000.00
1020 Phila. & Wilm. Railroad bonds, 940.00
These stocks were estimated on the 27th May, 1842, by Charles Macalester, Thomas Wickereham, and Joseph Swift, brokers, to be worth, at that time, $46,705, showing an estimated loss of $9,634.62.
So much for the unholy connection of Bank and Church. If any one had proposed to invest the funds of the Church in lottery tickets, the whole body of clergy and laity would have been "horrified" at such a proposal. But those who had the management of the financial concerns of the General Assembly, chose to employ its funds in a far worse kind of gambling, to wit, in paper money banking, and no one ought to regret the loss that has consequently been sustained.
Bank Defaults.In our 23rd number, we inserted a paragraph from the Public Ledger of this city, in which, among others, Levi Eckley, of Macon, Georgia, was charged with being a defaulter. An Augusta correspondent of the Charleston Courier, denies, in very indignant terms, the truth of this charge. The statement appeared originally in a Charleston paper.