William Gouge
An Inquiry

CHAPTER XXVIII.
Of Banking on Proper Principles.

There is nothing novel in the modern system of Banking, except its being carried on by corporations and by the instrumentality of paper money.

Private Bankers were known to the Greeks, the Romans and the Jews.  At Rome, especially, they appear to have been very numerous, and to have done an extensive business.  The shops round the Great Forum were chiefly occupied by them, and we may learn from Cicero and other ancient authors, that the Romans commonly paid money by their intervention.  A Roman would sometimes give an order, or, as we should say, draw a check on his Banker: but the usual way of managing pecuniary transactions, was by writing their names in the Banker's books.^[1]

Previous to the establishment of the Bank of England, the goldsmiths of London performed most of the functions of Bankers.  To those who deposited money with them, they sometimes allowed six per cent. interest, but the usual rate did not exceed four per cent.

In Virginia, as is stated by a writer in the Richmond Enquirer, the merchants formerly acted as Bankers to the planters.  Governor Wolcot, in his Message to the Legislature of Connecticut, in May 1826, says that "private Banks existed in this country before and a short time subsequent to the Revolutionary War."

As a country advances in wealth and population, the business of dealing in money naturally becomes a distinct profession.  It is a business which requires no laws for its special encouragement: no charters to cause it to be conducted to the public advantage.  The trade in money is as simple in its nature as the trade in flour or the trade in tobacco, and ought to be conducted on the same principles.

Restore the natural order of things, by abolishing money corporations, and, in those parts of the country where there is little population, little wealth, and little commerce, there will be little Banking: while in those parts of the country where commerce is extensively carried on, Bankers will rise up in proportion to the wants of the community.

In most villages, all the call there is for Bankers could be answered by the Postmasters.  Offices of deposit, of transfer, and of loan, are not necessary in villages.  The only call there for a dealer in money, is to collect debts due to persons at a distance, and transmit the money to to whom it is due.  The publishers of periodicals now collect great part of what is owing to them on account of subscriptions through the medium of the Postmasters.  Many of the debts due to merchants might be conveniently collected in the same way, if Government were careful to appoint none but solvent and trust-worthy persons to be Postmasters: and if it should make a rule to remove them on proof being given of their having neglected to pay over money which they had collected.

But it would not be necessary for Government to go even this far, for us to have a good Banking system.  The Postmaster, in most small towns, would stand the best chance of becoming collector of debts for persons at a distance, and the commissions he would receive would, in many cases, exceed the amount paid to him as a public officer: but if he was found untrustworthy, or incapable, the business would be transferred to the storekeeper, or some other respectable inhabitant of the village.

In the larger towns, and even in the small towns which are centres of wealthy districts, the business of dealing in exchanges, and of acting as an agent between lenders and borrowers, would become a distinct profession.

In each city the number of Bankers would be in proportion to the amount of business to be done, and their capital in proportion to the trade of the city.  A merchant of Philadelphia who wished a note discounted, would, in stead of having his choice among a dozen corporations, have his choice among perhaps twice that number of private Bankers.  Instead of being obliged to approach the supercilious Director of some overgrown monied institution, he would deal with a private trader, to whom it would be of as much importance to lend as it would be to himself to borrow.  The extent of business these private Bankers would do, would depend, in a degree, on the disposition they showed to accommodate their customers.  The competition amongst them would be so lively, that, after the manner of the Bankers of Europe, they would allow a credit on deposits.  Being responsible in the whole amount of their private fortunes, they would seldom extend their loans so far as to cherish the wild spirit of speculation.  Their whole fortunes would be in the business, and their whole faculties exerted for its proper management, and it is in this way only that any business can be well conducted.

If there should be a necessity for placing any restrictions on these private Bankers, it would be simply that of restraining them from issuing notes, bills, or checks, which would circulate in the same way as the present Bank notes.  Some intelligent men who have turned their attention to the subject, think that even this would not be necessary.  They are of opinion that the competition among private Bankers would be so brisk, that they would effectually check one another.

In opposition to this it may be urged, that much has been lost by the breaking of private Bankers in England;  though it must be admitted, this is not a case exactly in point, since the private Bankers of England are influenced in their operations, though not regulated, by the great corporate institution of that kingdom.

In Scotland, where the private Banks have the predominance, little has been lost by the breaking of these institutions.  But, the evils produced by the occasional breaking of a Bank, are far from being the greatest evils of the system.  No instance has occurred of a Bank breaking in Philadelphia, and yet who can adequately describe all that the people of this city have endured from Banking.  We have satisfactory evidence that the Scotch Banks, by their "expansions" and "contractions," produce evils, the same in kind, though not in degree, as are felt in Philadelphia.

But in neither England nor Scotland, can we, perhaps, be said to have a fair example of private Banking, as the Government receives Bank notes in payment of taxes.  When the Government receives one kind of paper, the people lose their clear perception of the difference between cash and credit, and where room is made in this way for the circulation of paper, the most worthless kind sometimes obtains circulation as easily as the best.  "Numberless instances," says the Edinburg Review, "have occurred in the history of British banking, within the last few years, in which the notes of individuals without any real capital, and who were from the beginning in a state of insolvency, have continued to circulate for a long period in company with the notes of the best established houses, and to enjoy an equal degree of credit."

The private Bankers on the continent of Europe do not circulate any paper, but it is not in our power to say, whether this is, in all instances, owing to obstacles thrown in their way by Government, or to the indisposition of the people to receive paper where it is not taken in payment of taxes.

If notes issued by private Bankers should circulate as the notes of the present corporations, they would become money.  As a credit money, they would necessarily fluctuate in quantity.  It is not desirable that, in addition to changes in the state of credit, proceeding from great natural or political causes, we should have changes in the currency, to add to the uncertainty of trade.^[2]

If these notes produced no other evil, they would prevent us from accumulating that stock of metallic money, which is required for the varying exigencies of peace and war.  After this had been for a time in circulation, the receiving of them would be, as in the case of the present Bank notes, a matter of necessity rather than of choice.

The evil would, indeed, in time, correct itself;  but if we can prevent it, why suffer it at all ?^[3]

We can certainly carry the credit system far enough, by the agency of leger entries, notes of hand, bills of exchange, and bonds and mortgages.  We do not require the additional aid of credit money, to run us deeper in debt.

Why should a private Banker, having a capital of his own of five hundred thousand or a million dollars, and deriving therefrom an income of thirty thousand or of sixty thousand per annum, desire to double his income, by the circulation of paper money ?  He would make a legitimate use of his credit, in receiving money on deposit, at five per cent., and lending it again at six per cent.  More than this he ought not to desire.^[4]

If the capital of a private Banker is small, he will derive as much profit from his credit as he is justly entitled to, in his commission on bills of exchange, and in the difference between the rate he will pay for money taken by him on deposit, and that at which he will lend this money to others.

The issue of notes by Bankers, for the convenient discharge of their own business, will not be necessary.  The private Bankers of London and Lancashire issue no notes.  At the clearing-house in London, in which their accounts are daily settled by an exchange of checks, transactions to the amount of four or five millions sterling are adjusted with the help of about two hundred thousand pounds in money.

If arrangements of this kind were not found to answer the desired end, a public Office of Transfer and Deposit might be established in each city, on the model of the Bank of Hamburg, with the exception of buying and selling bullion and dealing in exchange, which ought to be left to private Bankers.  The establishing of such an Office would be attended with a little expense, but if it would not be worth paying for, it would not be worth having.  If the Bankers objected to paying all the expense, the Government might, as such an office would be a safe and convenient depository of the public funds, share the expense with them.  There is nothing in the constitution to prevent the establishment of public Banks, which shall be mere Offices of Deposit and Transfer.  And as such Banks would be a great public benefit, the defraying of their necessary expenses out of the public revenue would not be objectionable.

In this way, we should secure all the advantages the present system affords, and avoid all its disadvantages.

We should have places of deposit safer than the present;  for the money deposited in a public Bank by one man would not be lent to another.

The business of settling accounts by transfers of credit, would be greatly facilitated.  One public Bank would suffice for each city, and the time which is now lost in running from Bank to Bank, would be saved.

The private Banks, paying interest on deposits, would extend throughout the country the advantages of Saving Banks.

Men who wished to borrow, would deal with a private Banker as an equal, instead of dealing, as at present, with an overgrown corporation, as a superior.

The business of dealing in exchange, would be better conducted than at present, for it would be left free to in dividuals, and they would show the same disposition to oblige and to give satisfaction, that is now evinced by the dry goods merchant, or the importer of groceries.

Instead of having to pay the expense of three or four hundred public Banks, we should have to pay the expense of only twenty or thirty, for this number of offices of deposit and transfer would suffice for the whole United States.

We should escape all the evils that flow from Banks as corporations, from fluctuations of the circulating medium, and from the false system of credit which has its origin in the present banking system.

And what should we lose ?  The supporters of the present system admit that "the only substantial advantage at tending paper money appears to be its cheapness."  Taking their own estimates of the amount of Bank notes and Bank credits, the sum thus gained does not amount to more than forty cents a year for each individual in the nation.  Is it worth while for so trifling a gain, (admitting it, by way of argument, to be again,) to endure all the evils evils of a bad system, and forego all the advantages of a good ?

1   "In foro, et de mensæ scriptura, magis quam ex arca domoque, vel cista pecunia numerabatur." –Terrence.
“The mensæ scripturæ served in that which touched the activities of banking, as much to establish contract, as to furnish proof, and the greater part of payments were effected by transcriptions and endorsements recorded in the account books of the argentarii;  direct payment (domo ex arca sua) was rarely made, but it was very often made through the intermediary of bankers (de mensa scriptura),whether moneys had been deposited with them for which they were obliged to give account (rationem reddere), or whether it had been possible to open a credit with them out of which they made payment following an assignment.” ---Manuel des Antiquités Romaines, by Mommsen & Marquart, Paris, 1888.

2   "Hitherto," says Tooke, "the Legislature has restricted individuals, under the severest penalties, from establishing private mints, and uttering metallic money of intrinsic and discreditable value;  yet, with a degree of inconsistency which strikes us as most extraordinary the more attentively we consider it, our law-makers have permitted individuals to establish private Banks of circulation – and to utter paper money, possessed of only a conventional value, which a breath of panic may at any time destroy.  On the same principle that the Government protects the public against the probable insecurity which might arise from individuals being permitted to utter metallic currency, it should guard against the more probable, nay certain insecurity which is created when individuals utter a paper currency.  In every civilized country, supplying and regulating the circulating medium is a function of the sovereign prerogative.

3   What is here advanced is not at variance with the principles of Adam Smith, as will be seen by the following extract from his writings:
    "To restrain private people, it may be said, from receiving in payment the promissory notes of a Banker for any sum, whether great or small, when they themselves are willing to receive them;  or, to restrain a Banker from issuing such notes, when all his neighbors are willing to accept them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe but to support.  Such regulations may, no doubt, be considered as in some respect a violation of natural liberty.  But those exertions of the natural liberty of a few in dividuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments: of the most free, as well as of the most despotical.  The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed."
      The proposal Adam Smith here supports, is that of prohibiting private Bankers from issuing notes of a less denomination than five pounds sterling, nearly twenty-five dollars Federal money.  On the principles on which he proposes to prohibit the issue of notes of some denominations, the issue of notes of all denominations may be prohibited.

4   "There is no more reason why a man, or body of men, should be permitted to demand of the public, interest for their reputation of being rich, than there would be in permitting a man to demand interest for the reputation of being wise, learned, or brave.  If a man is actually rich, it is enough for him to receive interest for his money, and rent for his land, without receiving interest for his credit also." –Raymond.