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respect it enjoys over other descriptions of property; but in all respects it is subject to the same law of supply and demand that control the value of other descriptions of property. It is obviously the most fluctuating description of property, as the supply is not only controlled by natural causes, but by those artificial means by which it becomes impressed with the peculiar attributes of specie. In this respect a representative circulation has the advantage of representing the vast capital of the country, the fluctuations of which balance each other, giving some approach to an undeviating standard of value.
The introduction of the bank note system worked a revolution in banking, in which the spirit of avarice prevailed over reason, and established a bad principle only partially extirpated at this time.
One of the earliest facts developed in practical banking, by the introduction of a paper circulation, was, that for the ordinary purposes of banking, but a small percentage of specie as compared with the aggregate amount of notes issued was required for their redemption as they were ordinarily returned for payment. This was a result necessarily attending the issue of a representative circulation; for where notes are put in circulation, representing a specie capital, the capital must of necessity remain in the bank, until demanded in redemption of the notes.
Thus the bank would constantly have unemployed on its hands an amount, the average of which would be equal to the amount of its notes, kept constantly in circulation. Still, in addition to this, as a place of deposit for specie, the bank commonly holds large amounts on deposit, for which no other use can be made than to employ it for the redemption of its notes, thus, reducing the amount of its capital required to be kept by it in the form of specie.
The bank finding that practically it employed but a small amount of capital, as compared with the amount of business done by it, naturally came to consider the possession of a larger amount of capital as an unnecessary superfluity, and being loose from the restraints of law, acted practically upon this conclusion.
If it had the credit of possessing capital, it mattered not that its notes represen
ted an empty falsehood, instead of real capital, their currency was all that was desired, and that was attained. Or if it actually possessed such unemployed capital, the temptation to speculate with it, soon placed it beyond the reach of bill holders.
False as this principle was, it is not so remarkable that it was adopted by the banks, as that its falsity escaped the attention of statesmen and economists. The condition of the bank was deemed sound at a moment when its capital or property basis could afford the means of redeeming but a small proportion of its outstanding engagements. The deficiency was supposed to be supplied by the notes of private individuals, obtained by discount in exchange for its own notes or credit. A circulation to the extent of two and a half times the actual capital was permitted. The bank stood no longer in the light of a capitalist applying actual capital to the business of the country; but as a mere speculator, exchanging a credit bearing no interest, for one productive of interest. This advantage it can enjoy, solely for the reason that the name of bank carried with it a certain prestige denied to individual reputation.
It followed that the bank was sound no longer than the individuals whose notes it held were in a solvent condition, while the occurrence of financial embarrassment was sure to endanger, if not overwhelm the bank, rendering its widely scattered circulation a precarious, if not a worthless possession.
We have endeavored to trace the development of the banking system, from those necessary laws that stamp a fixed relation on the society of mankind; but here we encounter a system purely artificial. The principle of the system, if principle could arise out of a mere artificial order of things established at the suggestion of avarice, was that the credit of the bank being not absolutely dependent on the credit of a single individual, but of the aggregate of individuals whose notes it holds, was of a more reliable character, and therefore an exchange of an uncertain credit, for one of better standing, was a good operation both for the banker and the borrower.
The fruit of this system was such as could only spring from its principles. Where it prevails, it is not unusual to see banks suspend specie payments with an
extended circulation, empty vaults and worthless assets. A general distrust of banks ensued, democratic zeal was stimulated, not to detect and correct the erroneous principle which had crept into banking, but to destroy all banking privileges. At this juncture, in the State of New York, Whig Legislation detected the evil principle, and extirpated it effectually from banking in that state.
The guaranty system seized upon the principle, that the bank should be a capitalist in reality, as well as in name, and demanded of it public assurances, and pledges, that this character was genuine, and not fictitiously assumed. The general features of the New York system were so fully presented in the article alluded to in the former part of this essay, that it is unnecessary again to present its details.
Under this system, the bank is required to possess in an available form, means sufficient for the redemption of the whole circulation issued by it. This capital need not be in the form of specie, but might be invested in permanent interest producing securities, reserving however sufficient specie to meet the emergencies of business. As affording the most generally approved security, investment in public stocks and in mortgages of real estate, was suggested as most fitting to render the surplus capital at once productive and safe.
But as capital safely invested to-day, may be withdrawn and launched into speculation to-morrow, a still further point was to be attained by the system, and this was accomplished by requiring the bank to deposit the stock and mortgages representing its capital, in the hands of a responsible public officer.
Nature exhibits in all her processess the profoundest economy in the use of means, setting an example to the reason of mankind. Starting from the rude and clumsy expedients of savage life, the progressive development of the human intellect is marked by increasing economy in the use of means. This is the result of a clear acquaintance with the laws of nature. no direction has science as yet applied the exertions of mankind so as to attain the highest possible productiveness. On the contrary, we are yet in the infancy of mind, with much yet to ransack and learn before we understand all that this world of
ours contains. We handle the machinery of the great laboratory, but poorly as yet, producing very little to reward a great outlay of exertion. As we approach maturity, we shall know more of economy, and produce greater results.
As much as science has done in other quarters, it has thrown but little light upon the productive capacity of capital. A very natural, but Epicurean idea seems to prevail, that the productions of labor are intended solely for the present comfort and enjoyment of mankind, and have no prospective duty to perform for future generations. Capital belongs to posterity; its economical use is all that is allowed to him that calls himself its owner. Enticed by a persuasive instinct, man labors as he supposes, for himself and his offspring, but nature turns his labors to a wider usefulness, raising up by them, myriads of intellectual, sentient beings. Such reflections are not useless, as they tend to dignify the science which has for its aim the direction of human labor.
If it seems surprising that capital may be in the exclusive possession and enjoyment of one, while another not possessing it, may derive an equal, or perhaps greater benefit from its existence, than he who possesses it, the surprise must be attributed to the small acquisitions which science has made in this department of knowledge.
Such a state of facts is exhibited by a bank having a circulation based upon capital invested in interest paying securities. The interest derived directly from the invested capital, represents the profits derived from the immediate employment of that capital, while that which is derived to the bank and to individuals, by means of the circulation, represents the value of the same capital employed upon the principle of credit. There are then two ways of employing capital, one by possession, the other by producing credit upon it.
One who holds a promissory note of approved value, derives a benefit from its possession, no ways diminished by the fact that he whose note it is, is actually enjoying the profits of the farm, which is the only means possessed by him for the payment of his note.
The principle involved is as obvious as the fact is certain-credit looks to the future productiveness of capital-its profit is
derived by anticipation; thus its use in no wise detracts from the value of its present enjoyment. Nor is there any improvidence in this anticipation of a future profit, for we have already seen, that this expectation of a future profit, leads the capitalist to place his capital within the reach of the laborer; thus fulfilling the ends of nature, in bringing capital and labor together, to co-operate in production.
The New York system attentive to this principle of economic employment, permits that portion of banking capital which is not required to be held by the bank in the form of specie, to be permanently and profitably invested, requiring only the representative of that capital in the form of public stocks or other securities, to be placed in the hands of a public officer, pledged for the redemption of the notes of the bank employing it.
A class of credits spring out of mercantile transactions, so dependent for their validity upon similar credits, that of themselves they form an insecure basis of commercial operations. So dependent are merchants upon one another, in consequence of the credits mutually subsisting among them, that all are concerned in the soundness of each, and are more or less affected by the failure of any one. To prevent the formation of such credits, where interest and the anticipation of profit invite to extending them, is impossible, whether attempted by the aid of philosophy or law. No statute could be framed sufficiently stringent to restrain merchants from trusting, where they deem it their interest to trust. The impotency of such legislation is exhibited in the instance of the usury laws; however wise or necessary such laws may be deemed, experience proves that they are incapable of enforcement, and therefore useless. If then, in the latter case, where to many minds a moral sanction is superadded to the authority of the laws, they are found to be destitute of power, how hopelessly imbecile would be a law rendered repugnant to the moral instincts, by attempting the destruction of credit. Far from submitting to such a law, those who violate it, would feel that they had done a commendable act, in trusting the credit of one whom it may have been their interest to serve, even at the hazard of incurring the censures of the law.
Taking it as a fixed fact, that merchants will trust one another, not deduced from any reasoning on the subject, but observed as an invariable consequence of the principle of self-interest, it becomes a question of the gravest interest to public economists, how to prevent as far as possible, the imprudent and extravagant propagation of credits. The temptations that almost continually present themselves to the mercantile classes, inducing an enlargement of their business operations, are in ordinary times sufficient, if unrestrained, to produce dangerous extensions of credit; but peculiar combinations of circumstances frequently hold out the most extravagant promises of gain to be derived from the enlargement of business operations, and consequent expansion of credit, too powerful for resistance, though placing in imminent hazard the security of commercial transactions.
Against such influences, the credit system-the aim of which, as we have seen, is to restrict abuses of the principle of credit-wields a powerful restrictive in banking capital. The constant tendency of banking is to withdraw from the market the uncertain credits of individuals for the most part based upon credits, and to replace them by a credit based upon the actual capital of the bank. Thus, while capital under wise restrictions struggles to become productive, it lends its strength to give firmness and confidence to the relations of commerce. On the other hand, the timidity of the capitalist, who looks only to a fair rate of interest, and a safe investment, acts as a counterpoise to the imprudent zeal of the merchant, when the hopes of speculation tempt him to go beyond the limit of prudence. As banking capital possesses such an influence on commercial operations, as to hold them in check by the withdrawal of its facilities, so when that capital is a reality and not a shadow, that influence will always be found on the side of prudence.
It is obvious, that these conclusions are not true of banking conducted upon fictitious capital, for there the credit of the bank is no more reliable than the credit of individuals even under the best of circumstances, and the replacing of the one by the other, is a matter of little commercial advantage, while as it respects a disposition to check speculation, the bank having but little at
stake, loses the characteristic prudence of the capitalist.
commercial activities, but admitting only of employment for evil, it would be a ground of grave accusation, that any system should furnish such facilities. Capital may be re
life, equally capable of a true or false direction; to hold it responsible, then for the use which is made of it, is as absurd as to charge the principle of animal life with all the irregularities to which it ministers their active power.
A casual and superficial observer might detect a supposed departure from this principle in the New York system. By as-garded as the vital principle of commercial suming the securities standing in the place of the actual property-capital, to represent merely a credit, it would appear that the credit loaned upon that capital, was but credit raised upon credit. But the strength and beauty of that system appears by a closer observation of its principles, to subsist in part, in the fact, that the credit that it extends is based upon actual capital, instead of mere credit.
It cannot with any propriety be said, that he who loans to another upon the security of a pledge of property-relies upon the credit of the borrower, for he holds the property pledged, and is so far to be regarded its owner, that if that which was borrowed is not returned, the pledge is retained. So the faith of the public pledged in its stocks, ought to be regarded as a security superior to all individual credits, and standing on an equal footing with the possession of any tangible property; for as the security of property is dependent upon the maintainance of the public faith, so the pledge of that faith secures the highest evidence of a permanent possession. Resting on such a basis, no credit can be deemed insecure.
Many evils have been attributed to banks, some of which are the result of the introduction of the erroneous principle in banking which we have already pointed out, while others are nowise chargeable to that cause. Among others, that of inducing speculation, has been with some, a principal ground of objection to the allowance of banking privileges. This charge has been urged with that undiscriminating zeal that involves both the good and evil in a system in accusations belonging to the latter only. As banking has in many instances been conducted, the charge is not unmerited, but it is the abuse of the principle which has given occasion to the charge of fostering speculation.
In one respect only, has legitimate banking an influence in promoting speculation, and that is by furnishing the means which may be employed towards speculative objects. If speculation made use of means which are not the common source of all
Speculation is the product of moral causes, and not the result of physical combinations. It springs from a desire for the acquisition of sudden wealth, and is attended by an excited state of mind ready to risk every present good, for the sake of some anticipated advantage. It is not uniformly observed to predominate at times when the use of capital is readily procured; but often arises when the ordinary opera
tions of trade are straitened for lack of means. This fact of itself, illustrates the absurdity of charging the origination of speculative feeling upon those causes which supply the material means of trading. Of all classes capitalists are least apt to be speculative, while they view such illicit operations with a degree of distrust sufficient to prevent them from entrusting their property with those that indulge in them. The bank as a capitalist is actuated by the same impulses to a safe and regular investment of its capital, and thus becomes an instrument of conservatism.
One of many instances may be cited illustrating the practical truth of this idea. The shifting of the balance of trade in our favor in consequence of the large exportations of grain, during the year 1847, induced larger importations from abroad than is usual, and a consequent efflux of specie towards foreign markets. Το check this tendency the banks restricted their discounts, taking good care that their funds should not fall into the hands of those who required specie for exportation. To a considerable extent the movement of the banks had the desired effect, and operated to repress foreign speculation.
Without justifying the opposition to banks, which has to a greater or less extent prevailed in different sections of our country, and has in many instances erected itself into an open and bitter hostility, it would do injustice both to popular discrim
ination and to truth, to deny that some grounds for it have not existed. Banking has too often been conducted with utter disregard to the principle that requires the bank to possess the qualities of a capitalist, to shield these institutions from just censures. Had this evil been incurable, it is doubtful whether on the whole, the destruction of the entire system would not have led to less inconveniences, than the irregularities occasioned by it. But the experience of the State of New York places it beyond a doubt, that by the aid of restrictive legislation, the usefulness of the system may be preserved without diminishing the profits which invites to that mode of employing surplus capital.
It has been seriously questioned whether the soundest condition of banking would not be produced by letting the banks loose from restrictive legislation, and leaving them to be regulated by the laws of competition, and of enlightened self-interest.
The opinions that are held with respect to the purposes of legislation, form the great distinguishing feature of the two great parties of our country. On the one hand a theory prevails, that the only office of legislation is to preserve the balance of personal rights, to redress wrongs, and prevent the commission of crimes. On the other hand, a more liberal and exalted view of the ends of government, recognises in it a patron of virtue and industry. Having the promotion of the welfare of society as its object, and indeed as the foundation of its authority, no expedient ought to be deemed illegitimate, which tends to produce that result. When the great power and influence of government are considered, it requires the strongest reasons to convince us of the propriety of denying to that authority, on any theory, the right to employ its energies for the encouragement and strengthening of industry. Such an opinion can only be justified by supposing that governments are not to be relied on as having sufficient sympathy with the pursuits of individuals. However true this may be of States, in which the sovereign authority is vested in an individual or body of men, whose pursuits have nothing in common with the pursuits of the body of the people, it is not justified by the experience of our own government. For whatever errors have been committed in
legislation, the sympathy of our government has always been with the people. And it is one of the happiest circumstances, that when we have been in error, not even the blinding influence of party zeal, has prevented us from discovering and correcting the mistake.
The state governments exhibit more instances of this character, than are to be found in the history of the federal legislation, from the fact that they embrace a wider range of objects, and have a more direct and immediate influence upon the interests of individuals.
To ascertain then, where legislation may with propriety be applied, it is only necessary to consider whether the result of its application will be beneficial to the common interest. By this simple test we are to judge, whether banking should or should not be exempt from legislative restriction.
Experience has abundantly shewn, that the law of competition is not sufficient to secure the best condition of banking. It may indeed be sufficient to render the merchant careful of his credit, and consequently restrain him from excesses; but this is because the eye of a cautious capitalist is upon him, while with the bank no such motives operate. It is not easy to shake the credit of a bank, so as to restrain its operations, unless its affairs have become so involved that premonition is lost upon it. Those operations which endanger the security of a bank, by directing its capital to improper uses, are of so secret a nature, that rarely is the condition of a failing bank accurately known, until it has become insolvent. If to meet this difficulty a provision of law is adopted, requiring the capital of the bank to be placed in such a position, that it may be commanded in the event of a failure, and that expedient is found to be attended with great public convenience, who shall say that it is an improper or illegitimate exercise of legislative authority? Beyond the regulation of the rate of interest on money, the law of competition has so small a restrictive power upon banks as to be unworthy of consideration. And yet the advocates of nonlegislation look to it, to correct all the evils to which banking gives rise, when it is conducted with disregard to the public interest. They would do well to account for the fact, that hitherto it has become neces