Condy Raguet
Currency & Banking

BOOK FOURTH.

Having, in the foregoing three books, laid before the reader the laws which regulate a metallic, a mixed, and an inconvertible paper currency, respectively, together with such collateral subjects as appeared to me to be necessary to a full understanding of the whole question, I shall, in the present book, invite his attention to a few matters of a miscellaneous character, which do not exclusively belong to either of the foregoing classifications, and the substance of which will be found in the heading of the several chapters.

chapter i.

There is, perhaps, no subject upon which more various and more erroneous opinions prevail, than that which we now propose to examine.  The expansion of the currency, the contraction of the currency, the depreciation of the currency, are every day expressions, and yet very few persons can precisely point out the real elements of which the currency is composed.  In many public documents, of late years, in which reference is made to the currency, one would be led to infer, that the coin in possession of the public, and the bank notes in circulation, constituted the whole of the currency; and that, consequently, the currency was depreciated or improved according as these two elements were augmented or diminished.  Newspaper writers and editors, too, generally take this ground, and it is really amusing to see the frequent attempts that are made by them, to illuminate the public mind as to the condition of certain banks, by a mere statement of their notes in circulation, without discriminating between post notes and notes payable on demand, and leaving out of view entirely, the amount of deposites and other immediate liabilities of the banks.

The most palpable error, however, that prevails in relation to this subject, is the notion entertained by many, that bonds, bills of exchange, and promissory notes, constitute a part of the currency.  If this be true, currency, or, what is the same thing, money, would become plenty in proportion to the multiplication of these evidences of debt;  whereas, every man of observation knows, that just in proportion as they are multiplied, currency or money becomes scarce, owing to the demand that arises for the means of paying them when they have reached maturity, or are becoming due.  Indeed, so far are these securities from constituting any part of the currency, that they even require a portion of that which is currency always to be kept on hand by the persons who are bound for their payment, in order to meet them at the appointed time.  The most that can be said of this class of obligations is, that they arc contracts for the payment of currency or money, at a future day, and as far as they are negotiated or assigned by endorsement, in the course of business, they constitute a portion of those various substitutes for currency, by which the country in which they are used is saved from the expense of maintaining a larger metallic or paper machinery for carrying on its trade.  Their operation, in fact, may be compared to that of the clearing house of London, whereat, by the daily meeting of the clerks of all the bankers, to make a mutual exchange of the acceptances of the principals of each, instead of a payment in money, which would be necessary if each acceptance were paid at each banker's counter, a very large amount of currency is economised, to the great benefit of all the parties.

Nor is the opinion less erroneous of those who suppose that public securities and the certificates of bank, canal, and railroad stocks, and such evidences of property, are currency.  These are in truth nothing but titles for property of a particular sort, and no more constitute a part of the currency than the deeds for lands and houses which the owners of that species of property possess.  With these preliminary remarks, I will now state in the first place, that the currency of a country in which there is no paper money, consists, and consists only, of gold and silver, and any other commodity which constitutes a legal tender, and which every creditor is obliged by law to accept in discharge of a debt.  Thus, in Virginia, in the year 1618, tobacco was made a legal tender at three shillings per pound;  and in Massachusetts in 1641, corn was made a legal tender at a fixed price;  and in 1643, Wampompeag (an article of traffic with the Indians) was invested with the same power in payment of debts to the amount of forty shillings, the white at eight a penny, the black at four a penny, except for county rates.--- Thus, also, in Maryland, so late as 1732, an act was passed making tobacco a legal tender at one penny a pound, and Indian corn at twenty pence a bushel.  In all these cases, the articles thus made a legal tender, constituted a part of the currency as much as gold and silver;  but as such absurd regulations could not but have led to the immediate production of extraordinary quantities of the articles named, it is presumable that they are to be regarded as the mere follies of a moment.

In countries at the present day, which carry on their affairs without paper money, gold and silver are the only currency.  In some, one metal alone is used, and in others, both metals at certain fixed proportions.  In some countries too, the legal coins alone of the nation are current, whilst in others foreign coins circulate upon the same footing as the coins of the country.  Copper, too, is the currency of some countries, for even large amounts;  but this metal constitutes so small a portion of the currency of most countries, that it is lost sight of, in discussions of this sort, precisely as it is lost sight of, when employed in the alloy of silver coins.

In countries where government paper money exists, but where banks have not been introduced, the elements which compose the currency are necessarily increased in number.  They consist of not only gold and silver, but of the promises of the government to deliver at a future fixed, or at an indefinite period, certain quantities of those metals, accompanied by threats of punishment against all who should refuse to accept of the same in payment of debts.  Such was the character of the paper money issued by the colonial governments of Pennsylvania and other states, prior to the American revolution, and such was that of the three hundred and sixty millions of dollars of continental money, issued by the American congress in seven years, commencing with 1775 and ending with 1781.  Such also was the character of the assignats of revolutionary France, and such is that, probably, of the actual paper money of some nations of continental Europe.  Large issues, however, soon depreciate the currency, drive out of circulation the metallic portion of it, and leave nothing but promises behind, which are rarely redeemed.

It may here not be out of place to remark, that the British exchequer bills, and the treasury notes of the United States, both of which are payable with interest, have not the character of paper money.  They are merely evidences of a temporary debt of the governments which issue them, are sold in market like public stocks, and have no more influence in augmenting the mass of the currency, than the bonds, acceptances, or promissory notes of individuals.

In countries where there is no government paper money existing, as is the present case in Great Britain, France, and the United States, the currency consists of those gold and silver coins which people are obliged to accept by law in discharge of debts, and of such promises of banks or bankers to deliver certain quantities of those coins on demand whenever called upon, as the public or the great body of creditors are willing to accept in lieu of the coins themselves.*

* The notes of the Bank of England are made by law a legal tender, except in the payment of its own debts, but no such measures can be practised in the United States, where by the Federal Constitution, it is declared, that no state "shall coin money, emit bills of credit, make any thing but gold and silver coin a tender in payment of debts," &c.  The authority of Congress over the currency, is limited by the same instrument to the simple power, "to coin money, to regulate the value thereof, and of foreign coins."  In the exercise of this power, it authorised by act of 2d April, 1792, the coining of silver dollars to contain 371¼ grains of pure, or 416 grains of standard silver, (the standard being 892.4 thousandths) half dollars, quarter dollars, dimes, and half dimes, containing respectively, one half, one fourth, one tenth, and one twentieth part of the silver contained in the dollar;  and by act of January 18, 1837, the coining of silver dollars, each to contain 371¼ grains of pure, or 412½ grains of standard silver, (the standard being raised by this act to 900 thousandths, that is, to nine parts pure to one of alloy) with the fractions of a dollar above enumerated, containing the same proportions.

It also authorised by act of 2d of April, 1792, the coining of gold eagles to contain each 247½ grains of pure, or 270 grains of standard gold (the standard being 22 carats, that is eleven parts pure metal to one of alloy, corresponding to 916.66 thousandths) half eagles, and quarter eagles, containing respectively, one half, and one fourth of the gold contained in the eagle;  and by act of 28th June, 1834, the coining of gold eagles to contain each 232 grains of pure gold, or 258 grains of standard gold (the standard having by this act been lowered to 21.58 carats and a small fraction, corresponding to 899.225 thousandths) with the parts of an eagle above enumerated, containing the same proportions;  and by act of January 18, 1837, the coining of gold eagles to contain each 232 grains of pure, or 258 grains of standard gold (the standard having by this act been raised to 21.60 carats, corresponding to 900 thousandths) with the parts of an eagle above enumerated containing the same proportions.  When not of full freight, these gold coins are a legal tender at proportionate rates.

In reference to foreign coins, the laws have been frequently altered, there having been periods at which none but the Spanish dollar was a legal tender.  That coin is still a legal tender, but, as it is worth in the market five per cent. more than the American dollar for exportation to China and some other countries, where it passes for more than its intrinsic worth, owing to its being there universally known, it is never now seen in circulation.  Other foreign coins, however, are now legal tenders, as will appear from the following extracts from the laws:

By act of 25th June, 1834, it is enacted "That from and after the passage of this act, the following silver coins shall be of the legal value, and shall pass current as money within the United States by tale, for the payment of all debts and demands at the rate of one hundred cents the dollar, that is to say, the dollars of Mexico, Peru, Chili, and Central America, if not less weight than 415 grains each, and those re-stamped in Brazil, of the like weight, of not less fineness than 10 ounces 15 dwts. of pure silver in the troy pound of 12 ounces of standard silver;  and the five franc pieces of France, when of not less pureness than 10 ounces and 16 dwts. in 12 ounces troy weight of standard silver, and weighing not less than 384 grains each, at the rate of 93 cents each."

And by act of 28th June, 1834, it is enacted, "That from and after the 31st of July next, the following gold coins shall pass current as money within the United States, and be receivable in all payments by weight, for the payment of all debts and demands, at the rates following, that is to say, the gold coins of Great Britain, Portugal, and Brazil, of not less than 22 carats fine, at the rate of 94 cents and 0.8 of a cent per pennyweight;  the gold coins of France, nine-tenths fine, at the rate of 93 cents and 0.1 of a cent per pennyweight;  and the gold coins of Spain, Mexico, and Columbia, of the fineness of 20 carats 3 grains and 0.7 of a grain at the rate of 89 cents and 0.9 of a cent per pennyweight."

There are no legal tenders now existing by law, but those enumerated.

---[what a convoluted web of coinage !]

As to the first element here laid down, there can be no dispute, inasmuch as every body must admit that the gold and silver coins recognised by law, constitute a part of the currency.  Still it may be proper to remark, that that portion of the coin which is at any time not in the actual possession of individuals, but lying in the vaults of the banks, and for the payment of which on demand the public is in possession of the promises of the banks, is not to be considered as a part of the currency, if the promises which represent it are estimated as a part.  Thus, if a bank has $500,000 in specie in her vaults, and has promises out payable on demand for $1,000,000, in estimating the currency as far as this bank is concerned, the specie would not be added to the amount of the promises, and thus make an aggregate of $1,500,000, currency.  In making up an aggregate statement of the two elements of the currency, it is not material whether the specie in the banks be counted, if at the same time the amount of the promises which represent it be reduced in the estimate to an equal extent, or, whether that specie be not counted, and the amount of the promises remains without reduction.  The aggregate result is the same, but I nevertheless give a preference, for the sake of simplicity, to the latter mode of stating the case, and would therefore say, that the metallic portion of the currency, we are examining, consists alone of the coins in the hands and pockets of the public.

In treating of the second element of our currency, the first thing to be established is, that the promise of the bank or banker, which passes current for money, must be a promise payable on demand, and not at any future period.  Every body knows the meaning of the term ready money or cash to be, something that is available for the payment of a debt at the very instant it is received.  A merchant who has a note to pay for a thousand dollars, on the first day of July, knows that he can not pay it on the day it is due, except with coin, or the promise of a bank or banker to pay coin of which payment may be demanded on that same day.  If he is even in possession of a post note of a bank or of a treasury note due on any subsequent day, he can not avail himself of it as cash, any more than he can avail himself of the promissory note of an individual, but must convert it into cash or currency, by getting it discounted.  It is quite easy to conceive of a great pressure existing in the money market of a commercial city, whilst the parties pressed for money, are in possession of an abundance of such treasury notes, or of post notes, of the best banks.

But in order that bank notes shall constitute a part of the currency, they must not only be payable on demand, but they must be universally current at the place where they are offered in payment of debts.  Thus, the notes of banks not located in Philadelphia are not, generally speaking, currency in Philadelphia.  It happens indeed very often, that some of the banks in all parts of the country, find their account in accommodating their customers by receiving from them as cash the notes of distant banks;  and it may even happen, that individuals may frequently find it their interest to receive distant bank notes in exchange for goods, or in payment of debts.  But in the great mass of cases, the notes of distant banks are sold in the market for currency just like bills of exchange, thus proving, that not only do they not constitute any portion of the currency, but that they even require a large amount of what is currency, to be held by brokers, for the purpose of buying them, and thus rendering them available to their owners.

Having thus, as I conceive, settled two important points in reference to the promises of banks which constitute a portion of the currency, I come now to examine those promises themselves, and to see wherein they consist.

The promises of banks for the payment of coin on demand, consist of,

First:  Bank notes promising to pay to the bearer on demand, a certain sum of money, and which are always negotiable by mere delivery, therein differing from the ordinary promissory notes of individuals, which are drawn to order, and are negotiable by endorsement.

Secondly:  Bank credits, or what are more commonly called deposites, being those amounts which stand to the credit of parties on the books of banks, and which are at all times payable on demand in coin, the same as bank notes, or which may, if the parties prefer it, be at any time converted into bank notes.

It is essential, however, as in the case of bank notes in order that these credits shall constitute a part of the currency, that they be payable on demand, for the very plain reason, that a deposite payable at a future day stands upon the same footing precisely, as a post note of a bank payable at a future day, and cannot be available as money before it is due, any more than any other debt.  Hence the deposits of our savings banks which are only payable at future periods, after due notice given, constitute no part of the currency.  The same is true of those deposites which have been for some years habitually received by some of the New England banks, for fixed periods at a stipulated interest, and those which some of the banks in other states, and especially in the southwestern, have found it for their interest since the late money crisis, to accept for definite periods from holders of their notes, who were willing to give time for their claims upon the payment of interest, or from others who were willing to assist them by loans of money.

And it may also be remarked, that as far as any portion of the deposits stands to the credit of parties, such as trustees, executors and administrators of estates, guardians of minor children, officers of courts, and others, who have deposited a fund to meet future demands, but without any immediate intention or authority to use it, so far they are to be viewed in the same light as deposits payable at a future day, and not as currency.  Thus, if ten thousand dollars be deposited in a bank by the assignee of an estate, to remain until a dividend is declared amongst creditors sixty days hence, the bank could lend that money for sixty days without augmenting the currency, and for this simple reason, that the depositor, had, upon the hypothesis assumed, parted with his right to the same fund for sixty days;  and therefore stood upon the same footing as other depositors whose claims were payable, not on demand, but at a future fixed day.

And here I will beg the reader to mark well the distinction between a deposit in a bank of discount, and a deposit in a bank of circulation.  The former constitutes no part of the currency, as I have asserted in the first chapter of the second book, for the simple reason that, although the depositor may have the right to draw out his coin on demand, yet this right is inseparably connected with the obligation on the part of somebody else, to pay into the hands of the banker simultaneously an equal amount, in order that the banker's stock of cash in hand to meet daily or unexpected calls may remain undiminished.  In the case of a bank of circulation the matter is widely different.  The depositor may be paid the amount of his deposite in bank notes, without its being essential to such payments that any debtor of the bank should be obliged simultaneously to discharge his debt, the operation being merely the substitution of one form of bank credit for another, and it is therefore in reference to such a bank that these remarks are made.

I am aware that in estimating bank deposites as a part of the currency, I am advancing a doctrine upon which a difference of opinion exists amongst intelligent men, and for the full establishment of which some elucidations may be necessary.  I first asserted this opinion, in the year 1821, in a report on the renewal of bank charters, made to the senate of Pennsylvania, and I have never seen any reason since to believe that it was erroneous.  Bank deposites, as they are called, originate in the following four ways:---

First.  Where a party deposites specie in a bank.

Secondly.  Where he deposites bank notes.

Thirdly.  Where he deposites a note for collection, and the amount, after it is collected, is placed to his credit.

Fourthly.  Where he gets a note discounted, and the net proceeds are passed to his credit.

In either of these cases, the depositor has a right to draw out from the bank either in coin or bank notes, without giving a moment's notice, the whole amount standing to his credit.  He stands, therefore, upon precisely the same footing, as regards his power of operating in the money market, or in the purchase of merchandise, as any other person who possesses bank notes, seeing, that if those with whom he deals should prefer bank notes, he can just as readily pay them in that way, by sending to the bank, as by giving them a check.  So true is it, that deposites constitute currency as much as bank notes, that in all our commercial cities, no other currency is used in all extensive transactions.  In all the cities of the United States, nearly all payments of money, except in very small sums in retail transactions, are made in checks on banks, and it is very clear that if deposites were not as much currency in the money market as bank notes, all dealers and traders would be furnished with the latter, instead of the former.  In truth deposites are nothing but specie or bank notes, left in the keeping of the banks for the convenience of the owner.

But again.  Let us test the soundness of this view, by a few hypothetical cases.  Suppose the banks in New York should all at once unite in augmenting their discounts to the amount of five millions of dollars, by which process their immediate liabilities would be in a moment augmented to that extent in the form of deposites.  Would the currency of New York be expanded ?  Would money be more plenty than before ?  Would competitors in the market with ready cash in hand be multiplied ?  If the answer to these questions be in the affirmative, and it is difficult to see how they could be otherwise, would the expansion of the currency amount to five millions of dollars, or only to the sum which should be equal to the amount of the bank notes that might be drawn out by the holders of these deposites, which would in all probability be but a small portion of the whole five millions ?  No one will, I think, contend that the expansion was not equal to the whole five millions, and it would consequently follow, that to restore the currency to its former position, a contraction of five millions would be necessary, and not merely the absorption of the notes, which might have been in the mean time added to the mass in circulation.

Again, suppose at a period when the currency was in a sound condition, money being neither too abundant nor too scarce, the banks of New York should, from some unfounded apprehensions, all at once reduce their loans to the extent of two millions of dollars, by which means their debtors should be obliged to raise funds in the market from that class of persons who had deposites in the banks, and who would of course draw checks upon them, and thus extinguish the liabilities of the banks existing in the form of deposites, to the extent of two millions.  Would the currency of New York be contracted ?  Would money be scarcer than before ?  Would competitors in the market with ready cash in hand be diminished ?  A negative answer could hardly be given to either of these questions, and hence the conclusion would seem to be self-evident, that deposites form a part of the currency.

Indeed, it is through the deposites of banks that the most powerful action is exercised upon the currency, where contractions are resorted to.  Debtors who are called upon to pay up large sums, would find it very difficult to procure them, if they were obliged to hunt up bank notes, scattered all over the country;  and if a city bank were fearful of being hard pressed, she would have very little concern about her notes, if she could only get clear of the demands of her depositors.  Deposites, in fact, in large commercial cities, constitute the largest portion of the currency.  In the city of New York, on the 1st of June, 1837, shortly after the stoppage of specie payments, the amount of notes in circulation outstanding for all the city banks, was $5,283,950, whilst the amount of deposites, public and private, was $15,843,171.

By the contraction which subsequently took place, the notes in circulation were reduced, by the 1st of April, 1838, to $2,322,186, and the deposites to $11,492,486.

I apprehend that no merchant in New York, who felt the pressure of that process, considered that a reduction of the deposites to the extent of four and a quarter millions of dollars, was no diminution of the currency;  and if we take into consideration the large amount of these notes, which must, at all times, be circulating at a distance from the city of New York, we shall also be satisfied, that deposites not only form a part of the currency of that city, but a very large part of it.

An examination of the condition of the banks of Philadelphia, would also show an excess of deposites over circulation.  By a statement of the condition of the fifteen banks of the city and liberties, on the 3d of November, 1838, (exclusive of the Bank of the United States), made to the legislature, it appears that the amount of their notes in circulation was $4,522,883, whilst the amount of their deposites was $6,813,503.  On the 1st of November, of the same year, the circulation of the Bank of the United States (exclusive of post notes), was $8,499,378, and the deposites $8,591,235, but of these notes, by far the largest proportion were circulating at a distance from Philadelphia, and, consequently, formed no part of the currency of that city.

Having thus, as I conceive, established the propositions laid down in the early part of this chapter, I will, in the next, endeavor to elucidate a matter of very great practical importance, to which the attention of congress and the state legislatures has never yet been particularly directed, relating to the aggregate amount of the currency at any particular period.

chapter iii.

When we consider the importance which the present banking system of the United States is capable of exerting over the property and industry, and consequently the prosperity of the country, it would seem to be but reasonable that the public, who must always be the victims of a vicious course of policy, should at least be furnished with some means of acquiring a knowledge of their position, in order that they might be prepared to escape from a threatened catastrophe, or at least to mitigate its force.  Such, however, is not the fortunate condition of the people of this country, and they seem to be destined to be for ever deprived of all opportunity of becoming acquainted with those premonitory indications, which usually precede a convulsion in the money concerns of a nation.  The truth of this remark will occur to most people, who recollect the fact, that the suspension of specie payments in May, 1837, came upon the country, like a sudden clap of thunder on a clear day, and overwhelmed every body with surprise.  I say, every body, for the exceptions were extremely rare, of those who, a month before it occurred, had the slightest apprehension of such an event.

This want of knowledge arises, from the circumstance, that the nine hundred banks and branches now operating in the United States, are the offspring of six and twenty states, three territorial, and one general government, between which there has never been any system of uniform action in relation to the terms of charters of banks, or in reference to uniform periodical returns of their condition as to liabilities and resources.  The consequence of this has been, that the returns of the condition of the banks, in no two states perhaps, correspond as to dates, or to particulars, nor do even the different banks of the same state always correspond in the latter.  In some there is a studied mystification in the mode of stating the account, designed to render it unintelligible, and which nobody but the president or cashier of the bank could explain;  whilst in others there is a total disregard of particularisation, by placing under the general heads of "miscellaneous," "other liabilities," "other investments," "specie funds," and other such terms, many important elements of a statement, without which the whole document is deprived of its utility.  If fair play with the public and honest dealing were the objects of these banks, there would be no need for such subterfuges and concealments.  Their accounts would be stated with fairness, and every facility would be afforded to the public to understand the true condition of the currency.

It is from such imperfect, heterogeneous and fraudulent statements as those we have described that the secretary of the treasury is annually called upon in January to furnish to congress a voluminous document, containing abstracts or copies of the same, with such condensed tables, as the arts of finance and divination combined will enable him to make out.  The consequence has been, that all those tables have been deficient in the important element of uniformity of dates, without which statistical exactness is impossible.  Thus, for instance, in his [Levi Woodbury] Report "on the condition of certain banks, &c," of 8th January, 1838, the statements of some banks are only made up to the month of May, 1837, which could throw very little light upon the condition of the currency in the month of November of the same year, to which period the returns of some other banks extend.

But this want of uniformity of dates is not the only point in which the secretary's reports are necessarily deficient.  There is a want of that specification of debts and resources, which no exertion of the secretary can remedy, by which the immediate liabilities of the banks can be distinguished from their deferred liabilities and their immediate resources from their deferred resources, without a knowledge of which, as we have shown in the preceding chapter, it is not possible to arrive at a true knowledge of the condition of the currency.  It is to be hoped that this matter will attract the attention of congress and the state legislatures, and that they may be induced to unite in some common system of action, by which all the banks of the country shall be required to make quarterly statements of their affairs at the same specified dates, and upon a plan uniform and simple, that no one who is acquainted with a common account current can fail to understand them.  But, even if such statements as are here recommended, were to be periodically furnished, it would require some skill in accounts to present their aggregates in such a form, as would show the true extent of the currency.

Those who have examined the treasury tables and statements must have perceived that the mere adding together of the deposites and circulation of all the banks would not give the true amount of the paper portion of the currency.  A large amount of the bank notes returned by the different banks as in circulation, have been deposited, by those into whose hands they passed, in other banks than those by which they were issued, and consequently, so long as they remain there, they appear on the statements of those banks as deposites.  Thus, if a person draw out from the Bank of North America notes of that bank for $1000, the proceeds of a discounted note, the accounts of that bank would show an increase of its notes in circulation to the extent of $1000.  If the same notes were then immediately deposited in the Bank of Pennsylvania, they would be reported by that bank as an increase of its deposites to the amount of $1000.  In such event, it is evident that the same $1000 would appear twice as swelling the currency to that amount once in the form of notes in circulation, and once in the form of deposites, whereas it is equally evident that the currency could only have been augmented one single $1000.  It follows, from this view of the subject, that in making out an aggregate statement of the circulation, there must be deducted from the aggregate amount of the notes in circulation, the total amount of notes reported in the different bank statements as "notes of other banks on hand."

It may, however, be said, that these banks did not come into possession of these notes by means of deposites as above assumed, but that they were exchanged for notes of their own.  Granted, but this makes no difference in the result.  The basks which received them, would report an increase of their own circulation to the extent of $1000, and if "the notes of other banks on hand" were not deducted, there would appear, as in the first case, a double augmentation of the currency to the extent of $1000.

But it may be further said, that these banks did not obtain possession of these notes in either of the two modes specified, but that they were paid to them in discharge of debts.  Is the nature of the case changed by this fact ?  Not at all.  An issue of bank notes to the amount of $1000, can not possibly augment the currency to the amount of $2000, and if we regard the banking system as one whole, just as if it consisted of a principal bank and branches, we can easily see, that if any of its members were in possession of any notes issued by any other of its members, they would be in possession of itself.  It would have been absurd to call the notes of the late Bank of the United States in possession of the New York branch, notes in circulation, and to have included them in the amount of the currency.

So also, in estimating the aggregate amount of the currency, must the amount of specie in possession of all the banks be omitted in the account, seeing that that specie having been derived from deposites, or in exchange for notes, already appears on the return of the banks in one of those two forms.

That the truth of these positions may be made manifest, I will make a practical application of them to a table found in the report of the secretary of the treasury of 4th January, 1837, on the condition of the banks.  We are there told, in document A.A., that as near to the month of December, 1836, as could be ascertained, the condition of all the banks in the United States was as follows:

As the account does not balance, it is probable that some of the resources of the banks have been omitted.

Now from this statement it is proposed to ascertain what was the extent of the currency of the United States at the period mentioned, in addition to the amount of the coin in the pockets and strong boxes of the public, which there appears to be no correct means of ascertaining, and for this purpose, I would state the account as follows.

Circulation, ..... $140,301,038
Deposites, ....... 115,104,440
255,405,478
Deducting notes of other banks on hand, 32,115,138
Leaves, ..... $223,290,340

Such would appear to be the actual amount of the currency as furnished by the above table.  But inasmuch as no distinction is made, between notes or deposites payable on demand, and post notes, or deposites payable at a future period; the account is deficient in a very important element of exactness.  For it can be seen, that if the deferred liabilities should have amounted to thirty or forty millions of dollars, the true amount of the currency would have been diminished precisely to that extent.

In regard to the two amounts expressed, by the terms "due by other banks," and "due to other banks," standing on opposite sides of the account, it must be obvious, that they are quantities neutralising each other, for the amount due by all the banks to each other, must be precisely equal to the amount due to all the banks by each other.  The difference between these two amounts in the table before us, arises no doubt from the fact, that owing to the distance of the banks from one another, there must always be on the route between them, funds in transitu, which although charged by the remitting bank to the account of the one to which they were remitted, cannot have yet appeared on the books of the other as a credit.

chapter iv.

It may be assumed as a principle that will hardly be disputed, that the soundness of a mixed currency of coin and paper such as we are likely ever to have in the United States, does not depend upon the fact whether gold or silver be the basis.  A currency may be quite as sound where silver is the only or chief metal that circulates, as where gold is the only or chief metal.  This is evident from the well known fact, that the currency of France which is of silver, is not more liable to fluctuate than that of Great Britain which is of gold.  I might even argue that it was in point of fact less fluctuating, but as all I wish to establish is equality, it is not necessary that I should take that ground.

It would seem that the great object of our act of June, 1834, was to establish a gold currency, under the belief that the tendency of gold to drive paper out of circulation would be stronger than that of silver;  and on that account the mint proportions were changed with the professed object of drawing gold into the country in preference to silver, when the course of trade should lead to the importation of the precious metals.  There can be no doubt, that had congress possessed the right of prohibiting the circulation throughout the United States of bank notes of a less denomination than ten dollars, a gold currency could have been introduced in the place of five dollar notes;  but as it possessed no such power, and as there was not the slightest probability that all the state legislatures would have co-operated in bringing about such a result, the measure was, to say the least of it premature.  But even admitting that all notes of a less denomination than ten or even twenty dollars could have been proscribed, I would ask, whether such a measure would have exempted the currency from all liability to fluctuations ?

This question can perhaps best be answered by referring to the experience of Great Britain.  In that country, no note is issued by the Bank of England, or by any joint-stock or private bank, of a less denomination than five pounds sterling, equal to upwards of twenty-four dollars, and yet England has been subject to many great fluctuations in her currency, one of which, that of 1797, brought all her banks to a stoppage of specie payments;  and another of which in 1825, was very near bringing about the same result.  It is not then the fact, of a mixed currency having gold or silver for its basis, which determines its stability.

Our own experience of forty-five years out of fifty-one since the establishment of the government, during the whole of which time silver was almost the exclusive metal that circulated, is sufficient to settle that question, and no one, it is presumed, will maintain the proposition, that the interests of the great mass of the people are not as well promoted by the right of demanding silver for a bank note, as of demanding gold.  Indeed, if we take into consideration the universal knowledge which prevails as to silver coins, the familiarity of every body with dollars and half dollars, the vast number of persons who seldom have five dollars in money on hand at a time, the less liability of being cheated with silver than with gold, and the additional fact that many existing ground rent deeds, bonds, and mortgages, expressly call for payment in silver dollars, it would not be hazarding too much to say, that silver is a more convenient coin for the people of the United States than gold.

If then it can be shown, that the possession of a gold currency in preference to a silver one, would be not only productive of no positive benefit to the community, but would be attended with positive mischief to the great interests of the country, all parties ought to unite in abandoning the project.  And this brings me to the point, to which the preceding remarks were designed to be introductory.

Prior to the passage of the gold bill above referred to, the metallic currency of the United States had been virtually, as above stated, a currency of silver since the establishment of the government, gold very rarely appearing, whilst that of Great Britain was of gold.  The consequence was, that the currency of each was independent of the other, and the contraction or expansion of each did not necessarily act upon the other.  The contraction in England, which preceded the resumption of specie payments, in 1821, after a long suspension of twenty-four years, produced no convulsion on this side of the Atlantic;  nor did our contraction, distressing and durable as it was, after the removal of the public deposites from the Bank of the United States, on the 1st of October, 1833, which brought down the prices of stocks from 20 to 50 per cent., and led to the importation of 3,793,293 dollars in silver from England alone, during the year ending on 30th September, 1834, produce any convulsion whatever in that country.*

* During the contraction last referred to, which occasioned a panic that continued from October, 1833, to July, 1834, exchange upon London, at New York, the market of which regulates the rate for all the other cities, fell greatly below the ordinary limits.  In February, 1834, the pressure for money was so great, that bills were sold, for a short period, as low as one to two per cent. below the nominal par of that period, which was, in reality, nine to ten per cent. below the true par.  A great fall, also, took place in every species of stocks, property and merchandise, whilst the discount on good commercial paper rose to two or three per cent. a month.

Notwithstanding this great pressure, however, it was not felt at all in England, except, perhaps, in the diminished remittances of merchants, so that her currency remained not only without the slightest contraction, but actually experienced an augmentation, to the great advantage of our shippers, whose cotton was sold without any reduction in price.

Such would have continued to be the case, had the mint regulations remained without alteration;  but no sooner was gold, by a change in its relative value to silver, rendered the most profitable of the two metals to import, than we found the currency of England disturbed to a degree that rendered necessary an immediate reduction of her paper issues, although the amount of gold drawn from her between the passage of the law in June, 1834, and the 30th of September, of the same year, was but 1,922,960 dollars.  To the importations of gold in the years 1835 and 1836, instead of silver, may be ascribed that further contraction of the British currency, which led to the crisis of the latter year, that was so fatal to American credits and American cotton, by which millions of dollars were lost to the country.

Now as like causes will produce like effects, it behooves us to examine well into this matter, and if we find that we have committed an error, it is our duty to retrace our steps.  Thus far very little progress has been made towards introducing gold into actual circulation, notwithstanding that a large amount has been imported,* still a long perseverance in the law will give us a gold currency, but it will be most dearly purchased.  It will so closely ally our fortunes with those of Great Brittan, that no convulsion can take place in the currency of that country, that will not act directly and powerfully upon ours;  whilst on the other hand, none can take place on our side, that will not act directly upon hers, and in so doing, break down the prices of cotton and tobacco, and other American products in the markets of Europe to the great injury of our planting interest.

Tables of the imports and exports of gold and silver coin and bullion, for the last five years.

But this is not all.  The tendency of the present regulation is to drive silver out of the country, and not gold, in all cases where coin is exported, the result of which will be, if long enough persevered in, to deprive us almost altogether of a silver currency, and in that event, a universal resort will be had in all the states to bank notes of the smallest denominations in preference to gold coins of similar denominations, as a remedy for the evil, a remedy, which, it is hoped, no friend of a sound currency desires to see adopted.

If there be any fallacy in this reasoning, it is not intentionally advanced.  The subject is a grave and important one, and merits the attention of all who are desirous to keep our country free from foreign alliances, whether they be pecuniary or political;  and should congress be convinced that a false step has been made, let that step be retraced.

Let the standard of the gold coin be restored to its former high grade, corresponding with those of Great Britain, Portugal and Brazil, that is, eleven parts of pure gold to one part of alloy, and let there be no coins struck at the mint but ounces, half ounces, and quarter ounces, without any fixed legal proportions to silver, but left to find their way into circulation at their fair market equivalency, as gold coins do in France and other countries of Europe.  By having coins of familiar and well known weights the people would form right conceptions of the true nature of money;  and as the bullion dealers and brokers in all the cities would quote the price of ounces of gold as they do of sovereigns, they would be at all times current at their market value, and could never be driven from the country by our own legislation, or that of other states.

chapter v.

Having, in a former chapter, promised to give my reasons for believing the principles of the New York banking law to be better calculated, if made general throughout the Union, to give stability to the currency than any other that would be likely to meet a general acceptance, I now proceed to fulfil that promise, and shall first give the reader a synopsis of its principal stipulations.

This law provides that the comptroller of the state shall cause to be printed from uniform plates, to be engraved according to his direction, bank notes of the various denominations authorised by law, which notes are to be countersigned, numbered, and registered in his office, in books provided for the purpose.  These notes are to be delivered to every banking association organised under the provisions of this act, which shall transfer to the comptroller any of the public debt of the United States, or of any state, that shall be approved by the comptroller, not less in amount than $100,000 and made equivalent in value to a New York State five per cent. debt in sums precisely equal to the amount transferred, hereby establishing the important and valuable principle of free trade in banking;  and when signed and executed by the respective associations, they become, to all intents and purposes, bank notes, and as such may be loaned and circulated as money.

In cases, however, where the association requiring the notes prefers to give mortgages, bearing six per cent. interest, upon "improved, productive, unincumbered lands within the state of New York, worth, independent of any buildings thereon, at least double the amount for which they shall be so mortgaged," for one half of the amount of the notes, the comptroller is authorised to accept the same in lieu of stocks, and in both cases the depositing party is to be authorised to receive the accruing interest.

The notes thus created upon an actual deposite of property of equal amount, are to be payable on demand in the lawful money of the United States, and in case of default of such payment, except for legal cause, for the space of ten days after the comptroller shall have demanded payment in consequence of having been apprised of the fact, by the protest of a notary, he shall proceed to sell, at public auction, the stocks and mortgages pledged in his hands, and with the proceeds pay the notes of the defaulting bank.  Protested notes are to entitle the holder to damages at the rate of fourteen per cent. per annum until paid.

The associations authorised by this act, are empowered "to carry on the business of banking by discounting bills, notes, and other evidences of debt, by receiving deposites, by buying and selling gold and silver bullion, foreign coins and bills of exchange in the manner specified in their articles of association, for the purpose authorised by this act;  by loaning money on real and personal security;  and by exercising such incidental powers as shall be necessary to carry on such business."

The shares of the stock are to be deemed personal property, and are to be transferable, like shares in other banks, carrying with them all the rights and liabilities of prior shareholders, and any association may provide in their articles for an increase of their capital, from time to time, as they may think proper.*

* This power to increase the capital of a bank to any amount that may be agreed upon in the articles of association, is, I conceive, a defect in the law.  We see every year banks applying to the legislatures to authorise an increase of their capitals, not because they can profitably employ more capital, but as a mere expedient to relieve themselves from embarrassments, by permitting their creditors, that is, the holders of their notes and deposites, to come into the concern as co-partners.  It appears to me that just in the degree that there exists a standing law to authorise such a mode of relief, will there be a tendency to the expansion of the currency, and a facility afforded for bolstering up, too long, insolvent borrowers, the effect of which is to prevent matters from settling down upon the solid foundation which the interests of the community demand, precisely as there would be, if the law authorised the issue of post notes, which very properly it does not.  This view of the subject is earnestly recommended to the consideration of the legislatures of the different states, which may, as that of Georgia has already done, adopt the New York system.

No shareholder is liable in his individual capacity for any contract, debt or engagement of the association, unless the articles of association shall have declared that the shareholder shall be liable.

From this abstract of the law, it will appear, that the security of noteholders is alone provided for, and that no provision is made for the protection of the depositors, who are left as in other banks, in case of a failure, on the footing of common creditors.  This distinction is founded upon the soundest principles of policy.  Bank notes invested with the character of money, from the very nature of the use they are designed to perform, must necessarily pass from hand to hand in the transactions of business, with a rapidity and universality, which preclude the possibility of a close inquiry into the responsibility of the drawers;  and there is therefore as good a reason why the public should be protected against loss from the circulation of paper money, as why they should be protected against loss from the circulation of metallic money, which is the design of establishing and maintaining a mint at the public expense.*  The case however is widely different with depositors.  The individuals who make deposites in a bank, are at all times in a situation to judge of the responsibility of the parties to whose custody they commit their funds, and there is no more reason why a special law should be enacted to protect them against loss, than that one should be enacted to protect any other class of persons who find their account in trusting others with their property.

* The late Isaac Bronson, Esq. of New York, whose skill as a banker was exceeded by that of no financier in this country, entertained the same opinion, as appears from an article written by him in the year 1829, and published in the Free Trade Advocate of July 11th of that year, in which he employed the following language.

"It will be seen from the foregoing premises, that the proposition which the banker makes, or, is supposed to make, to the public {on issuing his bank notes) when stripped of its mystery, is simply this:--- 'I will exchange my credit for your capital, but you must allow me the use of your capital without interest, and yet pay me interest for the use of my credit.  My credit will be of the same use to you as your money, and much more convenient;  and your money, while in my hands I can make productive, which would produce nothing if it remained in yours: whenever you prefer your money to my credit, you shall have it.

"To this proposition the public replies;  'You shall have the use of my money on the terms you propose;  but in a bargain so advantageous to yourself, it will be expected, as you have my money without interest, that you will give security to return it without loss.' "

But, although this be true as regards depositors, they have this advantage over the depositors under the old system, that the bank must either pay them in coin or in notes which represent actual capital and not credit;  and it is this feature in the system which gives it its chief superiority over the other.

In a former part of this work, I drew a distinction between the influence which deposites exercise over the currency when made in a bank of discount, and when made in a bank of circulation.  I stated, that in the case of a bank of discount, where the money was loaned to other people, and where the depositor also reserved his right of demanding payment at his pleasure, the currency could not be augmented, owing to the fact, that the banker, in order to pay the deposite, would necessarily be obliged to make some of his debtors simultaneously pay up an equal sum, that he might keep his usual stock of money on hand;  so that as fast as he enlarged the circulation by payments from his counter, he contracted it by drawing in an equal amount from other quarters, thus leaving the money out of doors precisely the same in amount as before.  I stated, on the other hand, that the operation with a bank of circulation was different, owing to the fact, that such a bank, on being called upon by a depositor whose money had been loaned out, was not necessarily obliged to call in a corresponding amount from a debtor, but might be able to satisfy the depositor with its own notes, by which means the money out of doors would be temporarily increased to the extent of these notes, and thus create a corresponding excess.

Now, as the New York law absolutely prohibits the issue of any other notes than those which represent capital, and as these can not be multiplied ad infinitum, as notes can be comparatively under the old system, it is manifest that the banks organised under it, have not the power to augment the currency to the extent that the others have, inasmuch as, like banks of discount, they can only meet the claims of depositors by compelling some of their debtors to pay up a corresponding amount, it being understood, as in the case of those banks, that the usual stock of money is always to be kept on hand to meet occasional or unexpected demands.

In reference to the other provisions of the law, they must speak for themselves.  If the numerous banks that have been organised under it, and which are daily increasing in number, act wisely, they will invest nearly the whole of their capitals in fixed securities and will be careful not to force into circulation a larger amount of their notes than the currency can readily bear without reaction.  They will also take especial care, that in lending the money of depositors, they will discount nothing but business paper, having a short time to run, or they may, if overtaken by a panic, find themselves in the hands of the comptroller before they are aware of it.