Edward Kellogg
A New Monetary System

Chapter IV.
The Banking System.
Section I.
Of banks, their institution, and the principles by which they are governed.

Banks, like other incorporated companies, receive their chartered powers by legislative enactments.  These charters make it incumbent upon the banks to divide their gains in dividends to their stockholders, and to report to the legislature yearly, or of oftener, their situation and standing.  It is presumed that the publishing of these dividends and reports will keep the people informed of the doings and utility of the banks.  Yet the practical operations of banking, and their special and general influences for good or for evil, are hidden from the public view.  Causes are felt to be in operation which the people cannot comprehend the changes in the market value of property, and in the prices of labor, are accounted for by the abundance and scarcity of money;  but why money is scarce at one time, and abundant at another, is to the great body of the people utterly unknown.

It is the intention of the author to place the institution and operation of our banking system fairly before the producers of the nation, that they may clearly understand its effects upon their interests.  The producers themselves will then determine whether they will change the system for one to be established on right principles, and that will act for the good of all, or continue the present one, the effect of which, for ages, in this and other countries, has been to accumulate wealth in the hands of a few, to the constant injury and hopeless poverty of the many.

The Constitution of the United States declares, Art. 1. Sec. X.  "No State shall emit bills of credit, make anything but gold and silver coin a tender in payment of debts." A bill of credit is a representative of property. A bank bill is a bill of credit;  it is taken for the amount of value, or property, set forth upon its face, and if it does not actually represent that value, the owner must suffer loss.

The General Government has reserved to itself the right to coin money and emit bills of credit.  It has, at least impliedly, assumed the obligation to provide a representative of property to the extent required.  It has, however, neglected to supply the necessary kind and quantity of money to effect the exchanges essential to the interest and welfare of all civilized communities.  The consequence has been an attempt of the State governments to supply the deficiency by the establishment of banks.  The mode of instituting banks has been various, but however instituted, experience has shown their unfitness to fulfil the public purposes of their institution, and also their unequalled power as instruments for gathering the earnings of labor to capital, without any adequate return.

The nature of banks is sometimes said to be similar to that of manufacturing companies.  The chief point of resemblance in their constitutions is, that the stockholders, both in manufacturing companies and in banks, are bound only for the amount paid in as capital stock, and are not liable for any further debts of the institutions.

In this particular they are on the same footing.  But in other respects they differ widely.  Banks are chartered in order to furnish the people with a public representative of value, that is, with a currency by which their soil and products may be exchanged.  Manufacturing companies are chartered in order to facilitate the production of useful articles for the support and comfort of man.  Banks deal in representatives of property, and the interest on these representatives the source of their gains.  Manufacturers gain by increasing the amount of actual production, for combinations of machinery diminish the expense of producing useful articles.  Still, although manufacturing companies may have an equal amount of capital with banks, say from $100,000 to $2,000,000, yet any man may manufacture articles made by companies, or any number of men may combine for the same purpose, without a charter or any other legislative authority;  and they have as much right to sell their articles in market as chartered companies.  If banking institutions and manufacturing companies be of the same nature, why do not legislatures allow individuals, however small their capital, to manufacture and circulate their notes as money, as well as to manufacture goods and sell them to anyone who will purchase them ?  Why, too, do they limit the amount of business that banks may transact, and leave manufacturing companies to be governed by the discretion of their directors ?  If banknotes be merchandise, why not allow banks to sell their notes for other merchandise, instead of lending them for an interest in money ?  Why do legislatures limit the interest that banks may charge for the use of their bank notes, more than they limit the price of goods manufactured by chartered companies ?  It is because the notes issued by the banks are made a public medium of exchange for all property, even for the goods of chartered manufacturing companies, that their quantity, and the interest upon them, are legally restricted.  It is true that legislative action has thus far accomplished very little toward the regulation of a currency;  but these restrictions upon it, and the necessity for legal authority to create it, prove that it is not regarded as merchandise.

The business of the public generally is made greatly dependent on that of a comparatively few individuals and corporations, who are empowered to issue banknotes;  for all the debts of the people must be founded upon and paid in money, most of which these individuals and corporations are alone authorized to furnish.  It is generally understood that the banks provide a very large amount of capital for public use, and it is therefore thought just that they should receive large amounts of interest.  But if it be found that the public furnish all the security to make the banknotes a safe currency, and that the banks gain immense sums in interest merely for their labor in manufacturing the banknotes, and exchanging them for indorsed notes of the people, it will be evident that the public is suffering a great and unnecessary loss, and could have this labor performed, and the same results accomplished, or rather a far more equitable currency maintained, at a comparatively small expense.

Formerly, all our banks were conducted under special charters, granted to each;  and their capital was professedly all specie.  More recently, several of the States have passed General Banking Laws, under which United States, and State stocks, and bonds and mortgages are substituted as part of capital stocks.  To establish a bank under the first system the persons desirous of banking petition their State government for a charter granting them the privilege.  The petition states that the bank is needed by the public, yet we shall see presently that it is not only for private purposes, but that it is to be conducted solely for the benefit of the stockholders.  The charter, according to law, requires the parties, or the stockholders, to furnish a certain amount of money, which constitutes the capital stock.  When this is paid in, the bank becomes an office of discount and deposit, and is authorized by its charter to issue and lend banknotes to circulate as money.  The chartered banks in the State of New York are authorized to discount two and a half times the amount of their capital: that is, a bank that has, say one million of dollars paid in as capital stock, is at liberty to discount or lend to the people two and a half millions of dollars.  Without a bank charter, the men who own the million of money which constitutes this capital, could lend only one million of dollars.  In granting the charter, the legislature grants to these few individuals the privilege of charging the people seven percent interest on one and a half millions of dollars never owned by the stockholders.  The bank issues banknotes bring no interest, and exchanges them for the indorsed notes of the people, bearing interest.[1]

The bank pays no interest upon deposits, and charges interest on all the indorsed notes given in exchange for its banknotes.  The interest upon one and a half millions of dollars’ worth of indorsed notes, at seven percent, amounts to one hundred and five thousand dollars a year.  This interest is paid on a capital which is entirely fictitious, so far as the bank is concerned.  If there be any capital underlying this one and a half millions of dollars, it is furnished in the indorsed notes given by the people in exchange for the banknotes.  The solvency of the bank for one and a half millions, depends upon the goodness of the indorsed notes received from the people, and not upon its own capital;  for however safely its one million of capital may be loaned, it can redeem but one million of liabilities.  If the bank should lose a million of dollars, by bad debts, or otherwise, the entire loss would fall upon the stockholders, for this amount is comprised in the capital of the bank;  and, by the charter, is made first liable for the losses which may be sustained.  But the remaining $1,500,000 of banknotes loaned could not be redeemed unless the indorsed notes received in exchange for the banknotes were against responsible persons.  If the drawers and indorsers were able to pay only a part of these notes, then only a part or a certain percentage of the banknotes could be paid;  and, if no part of the indorsed notes could be collected, the million and a half of banknotes would be a total loss to the holders.  The original $1,000,000 of capital has little basis of specie, and the surplus $1,500,000, issued over and above the capital, has none.  The latter is based upon a privilege granted by the government to a company of men to make banknotes bearing no interest, and exchange them for the indorsed notes of the people bearing interest.  True, all banknotes are made payable on demand in specie, and if banks refuse to pay specie they are liable to forfeit their charters.  But all obligations between individuals, even to book-accounts, are also legally payable in specie;  and all debtors are liable to prosecution if they refuse to pay their debts in specie.  The law which requires the banks to redeem their notes on demand in specie, no more furnishes them with specie for that purpose than it furnishes individuals with specie to redeem their notes and pay their debts.  Nearly three times the whole amount of specie in the banks in the State of New York, from 1835 to 1845, would have been required to pay their deposits, at anyone time during that period, and this without redeeming in specie a dollar of their circulation.  If specie should be generally demanded, the laws could not enable the banks to pay their notes and deposits in coins, nor individuals to pay their notes and debts in coins.

The principle upon which the contracts between the banks and the people are made, may be illustrated by supposing the government to fix a value upon ten silver spoons belonging to John Doe, and make them a tender in payment of debts.  As they are not sufficient in amount to form a currency, John Doe is empowered to make twelve paper spoons on the credit of each silver one, all of which paper spoons he is to redeem on demand with silver spoons.  He retains the ten silver spoons, and loans at seven percent interest the one hundred and twenty paper spoons, charging interest on them at seven percent, and receiving in exchange for them good indorsed notes payable in two, three, or four months in silver spoons.  All the paper spoons loaned to the people are payable in silver spoons on demand at John Doe’s office, who has but ten silver spoons to pay the one hundred and twenty paper ones.  If the holder of ten paper spoons, should demand and take the ten silver spoons, John Doe would be obliged to make the indorsed notes which he had received from his customer for paper spoons redeem the remaining one hundred and ten paper spoons which he had issued.  All these were based upon paper, and must be paid again in paper if they are paid at all.  Still, he would receive from the people interest upon a hundred and ten silver spoons which he never owned, and this by means of a legislative charter granted to him because he was the owner of ten silver spoons.  If the legislature would not sanction the balancing of these debts with paper, the people could never pay Doe in silver spoons the indorsed notes they owed him;  nor would Doe be able to redeem his paper spoons with silver spoons.  The drawer of the ten silver spoons would have engrossed the whole tender upon which all the contracts were founded.

In general, debts are contracted for land, labor, and products;  but none of these is a tender in payment of debts.  Debts are payable in a tender established by law, but are generally paid in banknotes which are used as a substitute for the tender.  Admitting then a silver dollar to possess intrinsic value equal to its nominal amount, how is it possible for it to make twelve representatives of itself, and make each one of the twelve as valuable as itself, when at the same time anyone of the twelve has power, to demand and take the silver dollar, and thus to leave eleven destitute of any basis of silver, and incapable of being paid in it ?  If paper money be allowed to pass as representative of specie, there should be a silver dollar for, every paper dollar.  Otherwise, the paper money cannot represent specie.  A silver dollar cannot be represented by two paper dollars, each of which would be as valuable as itself, more than the owner of one acre of land can give two deeds, each for the one acre, to different individuals, and make both deeds good.  The first deed must take the entire acre.  If the second be of any value, it must be made so by offsetting the consideration given in payment for the deed, and not the land which the deed purports to secure.  If paper money be allowed to circulate, it should not be under the pretence that it represents what it does not and cannot represent.

In April, 1838, the State of New York passed a General Banking Law, allowing any number of individuals to associate together and establish a bank, provided they furnish a capital of not less than $100,000.  To secure the public from loss by the issue of bank-bills under this law, the banks deposit with the Comptroller an amount in bonds and mortgages, or State stocks, equal to the amount of bank-bills which they are authorized to issue.  The bills are then countersigned by the Comptroller.  If any bank fail to redeem its bills, the Comptroller is empowered to sell the bonds, and redeem the bills with the proceeds.

This mode of supplying the public with money is deemed by many a very safe one.  Still, during the first six or seven years in which this new system was in operation, thirty-four banks failed, and did not redeem their notes at par.  Some paid only twenty-five or thirty cents on the dollar.  Others paid a percentage varying from thirty to ninety-four cents.  Of forty banks closed by the Comptroller, only six redeemed their circulation at par.  At the time of the Comptroller’s sale of the securities given for the redemption of their banknotes, the forty banks had a circulation of $1,233,374.  The circulation of the six banks of which the notes were finally redeemed at par by the Comptroller amounted to $120,729, leaving a balance of circulation of $1,112,646, which was compromised at rates varying from twenty-five to ninety-four cents on the dollar.  Doubtless a large amount of these notes was bought up by brokers at a much greater discount than that at which they were eventually redeemed by the Comptroller, so that the public lost probably from $700,000 to $800,000, besides the losses of depositors which do not appear.

It may be said that the securities placed with the Comptroller were not the bonds of the State of New York, but those of other States;  that these States failed to pay their interest, and consequently their bonds depreciated greatly below their par value, and were not good security.  True;  but at the time they were taken by the Comptroller they were deemed good security for the redemption of the banknotes.  It must be remembered, too, that in 1837 the bonds of the State of New York, bearing an interest of six percent, sold at about thirty percent below their par value.  The securities pledged with the Comptroller at the present time are of the same nature as those then pledged.  If the interest, on money should now rise as high as then obtained on loans of banknotes, the bonds of the State would again depreciate as much as in 1837.  The same loss of confidence in the ability of the State to pay its debts would exist, because rates of interest at two, three, and four percent a month so rapidly increase the indebtedness of the people, that their wealth is soon transferred to a few capitalists, who are enabled to control the rate of interest, and consequently the market value of State bonds and property.  As long as money can be obtained on good securities at six or seven percent interest per annum, the bonds of the State, bearing six percent interest, will command at least their par value.  But only so long as banks and capitalists choose to keep the rate of interest as low as six or seven percent, will these State bonds continue safe for the redemption of the bank-bills.

We will now see by whom the security of this banking capital is furnished, and by whom the interest upon it is paid.  In order to provide capital for a bank, the individual who desires to establish the institution must buy State bonds to secure the banknotes which he intends to issue.  He invests $100,000 in bonds, on which the people pay him six percent interest.  Although his money is invested, yet he receives $100,000 in banknotes, countersigned by the Comptroller, upon which he is authorized to bank.  Adding a few thousand dollars in specie to his banknotes, he opens up office of discount and deposit, loans out the $100,000 in banknotes, which the received from the Comptroller, and perhaps $100,000, or $150,000 more received from the people in deposit, on which he pays no interest.  He charges interest on all the money he lends.  If the people should call upon him to redeem his banknotes, and pay their deposits in specie, he would probably not have more than $10,000, $20,000, or $30,000 in specie;  and if there should be a run upon the bank, this would not meet the demand for a single day.  The banker would be compelled to suspend specie payments.  What would then secure the remaining indebtedness of the bank except the indorsed notes of the people, and the State bonds, for which the people are responsible ?  The banker is not liable beyond the capital invested.  He lends his money on securities furnished by the property of others.  The object of this Banking Law was the security of the banknotes.  This object, as we have shown, has not been realized.  The people have not only lost $700,000 or $800,000 by the failure of the banks to redeem their notes, but the depositors also have lost large amounts.  Deposits in a public banking institution, ought to be as secure as the banknotes circulated;  but for this no provision is made by the law.  Bankers, under the sanction of the General Banking Law, obtain interest from the people on two or three times more property than they actually own.  This law as also all other laws granting banking privileges, creates a fictitious capital for which the people are compelled to pay interest five or six times greater than they can afford to pay for real capital and at the same time justly reward labor.  It has operated to enrich bankers and capitalists, instead of operating for the benefit of the people.

Section II.
The amount of specie owned by the banks, and the interest paid by the people on bank loans.

"The chartered banks profess to transact their business entirely on a specie basis.  If, to show the actual amount of their specie, we take that of the banks of Connecticut, which have been conducted with as much safety to the public, and credit to themselves, as those of any other State in the Union, and far more than the average, it will be not only a fair but a favorable criterion of the specie capital of the banks in the other States.  The following table, extracted from the Merchant’s Magazine, vol. xvii., page 209, is an abstract of the Commissioners’ Report for eleven years, from 1837 to 1847 inclusive;  to which is added from the same work, vol. xxii., page 320, the Commissioners’ Report for the year 1849.  Thus we have the following statement of the condition of the banks during twelve years.

YearCapitalCirculationTotal LiabilitiesSpecie.Loans & Discounts
1837$ 8,744,697.50 $ 3, 998,825.30$15,715,964.59$415,386.10$13,246,495.08
95,273,629.57 38,549,575.13 $ 157,550,872.445,168,957.95126,292,898.33
$ 104,259,546.57$5,744,633.95 $ 140,033,489.33
Average Capital . . . . . . . . . . . $8,688,295.55
Average Liabilities . . . . . . . . . . . . 18,129,239.37
Average Specie . . . . . . . . . . . . .478,719.50
Average Loans and Discounts . . . . . . . . .11,669,457.44

By the foregoing table it will be seen that the average amount of the specie held by the banks in the State of Connecticut, for the twelve years, was $478,719, while the average amount of their loans to the public, during the same period, was $,11,669,457 — more than twenty-four and one third times as much money as the banks had specie.  The annual interest on $11,669,457 was $700,167.  If they could have loaned only their specie, the interest would have amounted to but $28,723.  The banks gained from the public annually, $671,444 above the interest on their specie;  and, in the twelve years, $8,057,328.  They collected this interest in advance, and made their dividends half yearly to their stockholders;  therefore, it is proper to compound this interest half yearly, which would swell their gains to nearly $12,000,000, that is to say, $1,000,000 interest annually.  These were actual gains, as much realized by these banks as if they had produced and sold annually $700,167 worth of agricultural products.

These banks were chartered with a professed specie capital, averaging for the twelve years, $8,679,962;  while the average of the specie actually held by them was less than one-eighteenth part of this sum.  How was this excess of capital above the average $478,719 in specie made up, and was it furnished by the stockholders or by the public ?  The specie held by these banks, as we have said, did not constitute one-eighteenth part of their professed capital;  hence there must have been other capital to make up the seventeen parts we find wanting, otherwise their banknotes could not have been safe;  for, one thousand dollars’ worth of land is as good security for the payment of eighteen thousand dollars in money, as one thousand dollars in specie for the payment of eighteen thousand dollars in banknotes.  But the banks, instead of eighteen lent over twenty-four dollars for each dollar in specie, so that the specie held by the banks was but a fraction over four percent of their loans.  The specie was, then, a very small item in the security of the banknotes, and was not essential to their safety.  If the banks in other States have, in proportion to their loans;  double the amount of specie owned by the Connecticut banks, it is no evidence that they are more safe, because their safety cannot depend upon four or eight percent of specie.  No banknotes can be safe money unless secured for their full amount.

Let us see how the specie capital of banks is generally made up.  Suppose one bank to be chartered with a specie capital of $500,000, all paid in, and to lend $750,000 for approved indorsed notes.  A second bank is likewise chartered with a capital of $500,000;  to make up which, $400,000 of the notes of the first bank and $100,000 in specie, also drawn from it, are paid in.  The notes of the first and second banks, together with a small sum in specie, form the capital of a third;  and thus bank after bank is formed, say to the number of eighteen, each with a professed specie capital;  while in reality, all of them together own only $500,000 in specie.  How is this excess over the $500,000 secured ?  The loans of the first bank for $500,000 were secured by the same sum in specie;  but when it had lent $250,000 more, the excess was secured by the indorsed notes offered by the people for discount.  When the second bank had discounted $750,000, the two banks had under discount a million and a half of dollars, one million of which was secured by indorsed notes, and but half a million by specie.  A third, fourth, and finally eighteen banks having discounted $750,000 each of indorsed notes, the aggregate amount would be $13,500,000, of which $500,000 only would be secured by specie, and the sole security for $13,000,000 would be the indorsed notes held by the banks against the public.  Some of these discounted indorsed notes might be against stockholders in the banks;  but all of them, whether against stockholders or others, are secured by the property of their drawers and indorsers, and not by the capital of the banks.  If thirteen, out of thirteen and a half millions of dollars, are made safe for the public use by these indorsed notes, evidently the remaining half million could be made safe in the same manner;  and we could thus dispense with specie altogether.  If ninety-six percent of the money is now secured by indorsed promissory notes, certainly the other four percent can be secured by similar means.

The people furnish the security for the banknotes, and pay the interest, which is the source of all the gains of the banks.  R. and S. are men of property.  R. draws his note at six months for $10,000, gets S. to indorse it, and then has it discounted at bank.  If interest be at seven percent, R. will receive only $9,650 in banknotes, and at the maturity of the note must pay $10,000 to take it up :  the bank thus gains $350 as the interest or rent of the banknotes for six months.  Under no circumstances would the bank discount the note unless it were deemed perfect security for the return of the money and the payment of the interest.  R.’s note, indorsed by S., and held by the bank, is secured by the property of these men;  and the banknotes secured by the indorsed notes are also secured by the same property of R. and S.  If the banknotes circulate for six months, R.’s indorsed note also secures to the bank the return of $350 more than it gave for the note.

A similar illustration may be made on a more extended scale, say on $5,000,000;  about the sum kept under discount by some of the larger banks in New York. Suppose a bank to discount notes, drawn and indorsed by various individuals in good credit, for $5,000,000, having (to simplify the process, and bring the gains under one item) twelve months to run.  It would pay to these individuals $4,650,000 in banknotes: and the $350,000 deducted as discount would be clear gain, less the labor to make and exchange the banknotes.  If the public need the $4,650,000 to meet the business obligations for the year, the money will continue to circulate, and the bank will not be called upon to redeem it, during that period.  At the close of the year, when the indorsed notes become due, if the drawers should collect every dollar of the banknotes issued, $350,000 would still be wanting to pay the bank the indorsed notes for $5,000,000;  and the people would be dependent on the bank for a further discount of notes to obtain the money due as the year’s interest.  If one bank furnished all the money of the nation, the people would be dependent on that one for money to fulfil all their obligations.  Increase the number of banks to a thousand, and the indorsed notes in proportion, and the transactions will be more numerous and appear more complicated, as they actually are;  but it will not alter in the least the principles upon which the banks gain the interest out of the earnings of the public, while the public furnishes all the security necessary to make the banknotes safe to circulate as money.

The people furnish double the security to make the banknotes safe that they give to each other in the ordinary purchase and sale of products.  The farmer sells his produce to the miller or merchant on credit;  the miller sells his flour, the wool-grower his wool, and the manufacturer his goods mostly on two, four, six, eight, ten and twelve months’ credits to city merchants, who resell them on like credits to other city or country merchants, and these dispose of them chiefly on credit, to farmers, mechanics and other consumers.  Farmers, mechanics and merchants, in ordinarily good credit, can buy goods on their own responsibility;  and their purchases are generally limited only by their own discretion.  But they cannot take book accounts to the banks, and get banknotes in exchange on the responsibility of the man who owes the money.  Notes offered for discount must have only a certain time to run, must be drawn by men known to the directors to be responsible, and indorsed by one or two others in equally good credit.  Thus the people do give at least double the security to make the banknotes safe to circulate as money that they do to secure themselves against loss in the sale of the products of their own labor.  Yet they pay to the banks five or six times more than a fair equivalent for the material and labor to make and exchange the banknotes for the indorsed notes;  and this is a total loss to the producing classes, and a clear gain to the banks.

We will now estimate the proportion of capital stock furnished in specie by the stockholders of the banks in the State of New York, and the proportion furnished by the balancing power of paper against paper.  The following table, taken from the State Register, shows how much of the State currency, in 1844 and 1845, was based upon specie, and how much was based upon paper notes :

Bank Reports for 1844-45.
Comparison of the principal items, at quarterly periods, from February, 1844, to February, 1845, inclusive.

February 1, 1844May 1, 1844August 1, 1844Nov. 1, 1844February 1, 1845
Capital.$43,649,887 $ 43,462,311$43,443,005 $43,618,607 $43,674,146
Canal Fund1,483,8431,506,1671,210,7941,584,5531,607,572
Due Banks15,610,55415,467,49416,102,92214,431,10311,501,102
Loans and Discourse$70,025,734$74,527,858$75,546,592$77,847,718$70,888,578
Stocks and promissory notes11,052,45810,362,33010,648,21110,778,67810,244,043
Specie10,086,542 9,455,16110,191,9748,968,0926,898,236
Cash Items4,502,4795,999,9524,916,8626,047,5284,839,886
Due from banks10,267,2078,817,1798,359,8288,767,5137,684,308

From the foregoing table, it will be perceived that the banks were indebted at the above period to the amount of from $101,272,468, up to $110,128,104.  Their average indebtedness, including the refunding of the capital stock to the stockholders, was $106,931,004.  The average amount of their specie at the different periods as above, was $9,119,001.  Deduct the specie from the indebtedness — i.e., $9,119,001 from $106,931,004 — and we have left $97,812,003, which sum must have been cancelled by paper.  Our banks have specie enough to redeem only about one-fifth part of their capital stock.  The balance of their capital stock, the redemption of the banknotes in circulation, and the payment of the deposits, are secured by the indorsed notes of the people, binding the property of the drawers and indorsers.  Their property as much secures the banknotes, as it does their own notes.  The banknotes are representatives of the property of the people, and not representatives of the property of the banks.  Not a single dollar of the paper issued over and above the actual amount of specie, is secured by their capital stock, because, if none of these indorsed notes and bonds of the State were ever paid, not a single dollar of the indebtedness of the banks, either for banknotes or deposits, above their actual specie, would ever be paid.  The $97,812,003 would be a total loss to the holders of the banknotes, to the depositors, and to the stockholders.

The interest collected on the indorsed notes and State bonds supports the banks, and pays all their extravagant expenditures in granite buildings, salaries of officers, etc.  They can pay their presidents and cashiers from $3,000 to $5,000 each, and other expenses, house-rent, etc., in proportion, to the amount of $40,000 or $50,000 yearly.  They can also pay to the stockholders from three to five, six, or seven percent in dividends every six months.  The banks under legislative authority make the public furnish the capital, and then pay interest on this capital.  But although the industry of the people supports the whole, they have no voice in the management.  The directors in the banks can at any time call upon them to payoff their notes and cancel the banknotes;  and if they fail, they are blamed for over-production and over-trading.  When the banks contract their loans rapidly, and distress the people, the directors are said to be prudent and judicious managers.  Yet if the people should demand specie, the banks could not pay it, unless they could collect it out of the indorsed notes of the people.  But these indorsed notes were never founded upon specie, and could not be paid in it, because the drawing and indorsing of the notes by the people, and the engraving of the banknotes by the banks;  and the exchange of the banknotes for the indorsed notes, do not create gold and silver coins to pay either the banknotes or the indorsed notes.  There has never been a time when the banks could have paid specie for a week for their average deposits are more than three times their whole amount of specie.

The table shows that the average amount of the capital of the banks in the State of New York, during the period mentioned, was $43,569,591, and their average indebtedness was $106,931,004.  The difference of these two sums is $63,361,413.  The annual interest upon $63,361,413, at seven percent, was $4,435,333, which the people of the State paid to the stockholders and officers of the banks for furnishing banknotes above the amount of their professed specie capital.  The people wrote their own notes, had them indorsed, and took them to the banks to be discounted.  The banks engraved their banknotes, and gave them in exchange for the indorsed notes.  For engraving these notes, and making these exchanges, the people of the State paid to the banks annually $4,435,333, or as much as the farmers of the State receive for four millions four hundred and thirty-five thousand three hundred and thirty-three bushels of wheat, at $1 per bushel.  The labor of producing such an amount of wheat was great;  the labor of producing the banknotes was very small, yet the interest paid on these banknotes would have bought this quantity of wheat.  At the end of the year the people of the State returned all the banknotes to the banks, together with the value of this large amount of wheat to pay the year’s interest.  The same amount of interest accrued every year, and called for the same amount of their products.  They sold their products in market, and paid the interest to the banks with the proceeds of the sales, the same to them as if they had carried their wheat and products directly to the banks to pay the interest.  If the entire capital of the banks had been specie, the people would have paid the same amount for the use of the banknotes which would have been issued over and above the specie.

The interest yearly paid for the use of $63,361,413, in banknotes, was a legal equivalent for the four millions four hundred and thirty-five thousand three hundred and thirty-three bushels of wheat yearly raised upon a certain quantity of land;  and the legal value of the $63,361,413, in banknotes, was equal to the actual value of the land and labor necessary to produce the wheat.  The power of the banknotes was an exact balance against these products and the land upon which they were produced.  If the quantity of money was at any time diminished, and the rate of interest increased, a larger amount of products was required to balance the smaller amount of money, and a larger amount of products to balance the interest on the smaller amount of money.  Still this money must have been used to balance products, for it was the only public representative of value, and must have been employed as a tender, or as a substitute for a tender, in payment of debts.  The promise of the banks to pay specie for their banknotes on demand, does not enable them to pay the specie, nor does it alter the monopolizing power of the interest on the money over products.

If our banknotes are good for the purchase of property by the people, certainly they should be equally good for the purchase of property by the banks.  Let us reverse the relative positions of the banks and the people.  Suppose instead of lending their money to the people to buy property, the banks should buy property with their banknotes, and let it out to the people.  This would put the banknotes into circulation, and the banks would be the landlords of the property, instead of being the owners and lenders of the money.  Let the people then call upon the banks for the redemption of the banknotes in specie, and in default of payment sue them;  and if they wish to borrow banknotes to save their property from a sheriff’s sale, charge them one, two, or three percent a month for the use of the banknotes.  Let the banks try to rent their property so as to make the rents pay these rates of interest.  This would only place the stockholders in a position similar to that in which they now often, though indirectly, place the people.  It is evident that it would be impossible for them to redeem their banknotes in specie, or to redeem them in any way except by selling their property and taking these banknotes in payment, as the people now give their notes to the banks and pay the discount, and when their notes become due, collect these banknotes together, and take them to the banks to redeem their indorsed notes.  If the banks should buy the property with their banknotes, and their friends should guarantee the property worth the price paid, the property and the guarantee would secure the banknotes.  It would only place the banks under the necessity of cultivating their property, and selling the products to pay the interest.  It would be as possible to redeem the banknotes with specie, under the supposed circumstances, as it now is.  If the banks were called upon to redeem them now, they would crowd the people, and sell their property, and in the supposed circumstances, the people would crowd the banks, and sell their property.  In both cases the debts must be cancelled by offsetting the property against them, for they could not be redeemed with specie.

It is perfectly obvious that our legislative bodies have founded our banking system on false pretences-upon promises the banks do not even expect to fulfil.  The only reason why the banks can exist upon such a basis is, that the people do not demand the specie for their notes and deposits.  The government enacts a law binding all debtors to make their payments in specie, when it is perfectly well known that specie does not exist in sufficient quantities to enable them to fulfil the requirement.  More than eleven-twelfths of the debts between the banks and the people are contracted with a paper balance, and have no reference to specie.  Of course, the only means of paying them is by balancing one paper note with another.  If the banks, or the people, or the government should in every case exact what the laws require, it would be impossible to meet the demand.  If the three should exact specie in payment for their obligations, it would inevitably bankrupt them all, and almost certainly cause starvation in the midst of abundance, if not civil war.  If the governments of the States as well as the General Government should refuse to take banknotes in collecting and disbursing their revenues, probably the people could not pay their duties and taxes.  The necessary withdrawal of specie to meet these engagements would at once cause the banks throughout the Union to suspend specie payments.  The need of money would then compel the people to petition the legislatures of their respective States to sanction this suspension, and allow the banks to continue to discount without paying specie on demand.  They would, however, still be allowed to charge interest upon all the indorsed notes of the people received in exchange for the banknotes, which would then be avowedly destitute of any basis of specie.

Can anything be more directly opposed to every principle of justice, than laws requiring the performance of impossibilities ?  Laws which, if the people should attempt to execute them, instead of promoting peace and happiness, would cause the greatest calamities that could possibly befall a nation.  It is essential to good government that the interest and welfare of the people should require the execution of its laws, and whenever their violation becomes necessary to the public good, it is self-evident that there is something radically wrong in the government itself.  A government should never allow anything to pass as a substitute for money;  the tender itself should be equal in amount to the wants of business.  The law making gold and silver the only tender in payment of debts is well adapted to build up and sustain monarchical governments, because it must infallibly accumulate property in the hands of a few, constituting aristocracies, which are essential to this form of government;  but the same reason that qualifies it so admirably for this purpose, renders it incompatible with a government having for its sole object the welfare and happiness of the people.

Section III.
Basis of the Bank of England.

The Bank of England is established upon a basis similar to that of the banks of the United States.  Indorsed notes secure the banknotes, and not specie.  The banknotes are not representatives of specie.  The bullion in the bank seldom much exceeds the amount of the deposits.  Should the depositors draw the specie, the only way in which the bank could redeem its banknotes would be to take them in payment for the indorsed notes it holds against individuals.  If these indorsed notes were not good, the banknotes would be worthless.  These indorsed notes are secured by the property of their drawers and indorsers;  their property, and not the property of the bank, secures the banknotes.

The Bank of England first issues £14,000,000, on government securities.  This is making paper balance paper.  It gives to the bank no ability to pay the £14,000,000 in bullion.  If two individuals should exchange obligations for £14,000,000, this exchange would not produce bullion to pay either obligation.  The banknotes for £14,000,000 have not a fraction of value, except in so far as they are secured by the government bonds, and these bonds are secured not by the bank, but by the property and productive industry of the people of England.

All the gains of the bank by the recent[2] rise of interest, were unfairly taken from the industry of the people, and appropriated to the stockholders of the bank.  The idea was given out that the bank was compelled to raise the rate of interest in order to be able to pay specie for its obligations.  If the bank had been established upon a proper basis, and had loaned its money to aid the productive industry of the nation, at a low and uniform rate of interest, instead of making its loans to stock-jobbers and brokers to reloan at high rates, the recent crisis, or any former crisis in the monetary affairs of the country could not have happened.  But the bank is established upon a false basis, promising to pay specie which it has not and cannot have.  Therefore, in the recent crisis, it was compelled to lend its money to brokers and stock-jobbers, otherwise they would probably have drawn its specie, and compelled it to suspend specie payments.  The bank and this class of citizens work for one another’s interest, and extort the last penny from the producers of the wealth, under the pretence that the money, or the bullion, is the real wealth of the nation, and they keep the people constantly toiling for the bullion without ever possessing it, while the owners of the bullion contrive to live in luxury upon what the labor of the people produces.

To show that the bank is sustained in its specie payments by its reciprocal operations with capitalists, and that the banknotes are secured by the indorsed notes of the people, and not by the bullion in the vaults, it will only be necessary to refer to the weekly reports of the bank.  October 23, 1847, bullion, £8,312,691.  Deposits, £8,588,509.  Net circulation, £20,318,175.  The bullion amounted to £275,818 less than the deposits: and if the deposits had been called for in specie, there would not have been a shilling in bullion toward paying the £20,318,175 of banknotes.  These, if paid at all, must have been paid by balancing them off against the indorsed notes of the people, held by the bank.  Again, January 222, 1848, the bullion had increased to £13,176,812, the deposits had increased to £10,774,870, and the circulation had diminished to £19,111,880.  Deduct the deposits from the bullion, and there remained £2,401,942 in bullion to pay £19,111,880. Deducting the bullion there remained £16,709,938, which, if it had been paid at all, must have been paid by balancing off the banknotes against the indorsed notes held by the bank;  as if two individuals should exchange notes, and agree to pay them in specie, but as neither has the specie to pay, agree to exchange notes again, and thus close the transaction.  The exchange of the banknotes, for the indorsed notes of the people, is different in this respect;  the bank pays no interest to the people, but it makes the people pay interest on the banknotes, and this interest absorbs the productions of labor.

Section IV.
The balancing power of banknotes and deposits.

It has been already stated that if the banks become indebted for a larger sum than the amount of specie in their vaults, the surplus above the specie must be paid by balancing paper notes with paper notes, until the amount of specie in their vaults is exactly equal to the amount of paper for which they are liable.  This statement was made taking into consideration only the indorsed notes discounted by the banks, and the banknotes issued by them as their proceeds.  The banknotes are, however, not only the balancing power for the indorsed notes, discounted, but are also the balancing power for all individual notes given in payment for sales of merchandise.  Although these business notes be not discounted at bank, nor put into bank for collection, the banknotes are the balancing power with which all these debts must be paid, as well as all State bonds issued, all bonds and mortgages given by individuals, and all debts contracted for lands, goods, wares and merchandise sold on credit or for cash.  All these debts must be paid either with banknotes, or with specie.  Taking an average of the whole amount of contracts, it is probable that not one dollar in a hundred is paid in specie.

A small amount of money is always capable of balancing or paying a large amount of notes, bonds and mortgages, and also of purchasing many times its own amount of property.  The money which pays for one farm may also pay for a second, third, and fourth, the same day.

The banks gain as much by the deposits left with them, as they would by the circulation of an equal amount of banknotes.  They pay no interest on deposits, and they lend their deposits to depositors and others, and charge interest on them.  In cities, every man who has a large business, keeps an account, and deposits his ready money in some bank.  Suppose a thousand merchants and mechanics keep deposit accounts of a thousand dollars each in the same bank, the sum will amount to a million of dollars.  The bank can lend this sum to the depositors themselves, and make them pay interest on it. The money may be paid out many times during the day;  but before three o’clock, when the banks close, it will return in deposit, and be ready for use the next day.  Some of the deposit accounts may be drawn down to a hundred, and some even to five dollars, while others may be increased to five, ten, or twenty thousand dollars, yet the average balance in bank will vary but little.  It appears from the Report of the Bank Commissioners, that the deposit accounts in cities are always very large, whereas in country banks they are generally small.  When farmers have money, they usually keep it in their own possession until they have occasion to pay it out.  The inhabitants of large cities deposit their ready money in banks, and pay it out by giving checks on the banks.

Most of the contracts in large cities are paid in this way.  The money is kept on deposit for convenience and safety;  and the owners can draw checks for larger or smaller amounts, and thus avoid counting the money.  The holder of a check has as good a right to draw specie as the holder of banknotes.  He can draw the money or he can deposit the check as if it were money.



1 [197/*]  Money is popularly said to bear such a rate of interest, as if the money itself bore the interest.  But, in fact, money bears no interest; for the obligation is given for the use of money bear the interest; for when money circulates in making cash purchases of commodities and property, in which no obligations are given, no interest is paid.

2 [216/*]  This was written previous to 1849. — [M.K.P.]