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ECONOMY OF BANKING, CREDIT, AND CURRENCY.
In a previous number* we reviewed the system of banking in operation in the State of New York, so far as it aimed to provide security for the redemption of bank issues of paper money, and suggested the application of that principle to the finances of the federal government. Since the publication of that article, the topics presented in it have been variously discussed in different sections of the country, and a disposition has been evinced to take into consideration the propriety of adopting the system there presented.
which reason may address itself with a fair hope of being heard.
The mathematical condition of mind, peculiar to this age, exhibits itself in a tendency to reduce all systems to a series of simple and demonstrable propositions. That which constitutes an excellence in mechanics, the habitual direction of the attention to the simple and comprehensive powers from which the more refined and complicated movements are devolved, frequently misdirects the mind in the study of economic science. In the one, that which is It is not our present purpose to present complex is derived, by variously combining anew the subject, treated in our former powers and movements,simple in themselves, number, either to develope more fully its and in reality, only complex in the sense practical bearings or to urge the impor- that the mind cannot, at a single instant of tance of its adoption. To that class of time, grasp the separate and combined opminds who are ready to adopt well consideration of each, while in the other, comered plans of improving those systems that exist among us, however imperfect or disjointed they may appear to be, the presentation of a plan so simple and obviously effective, carries with it a force of conviction to which the most elaborate analysis and the most fervent advocacy can add nothing.
But there are those who have thought much, if not profoundly, on the subject of credit and banking, who deem any improvement engrafted upon the present system, as hurtful to the precise extent, that as an improvement it ought to be deemed valuable, inasmuch as it tends to postpone the period of its radical overthrow. For those with whom radicalism is a passion and not a mere misdirection of the logical faculty, who strew their way from the cradle to the grave, with wrecks, beginning with the toys and play-things of infancy, and ending with constitutions, no argument can supply the defects of nature or education. But happily much of the radicalism of the day is merely a logical distemper, and to
* American Review, February, 1849, under title of "A plan for improving the national finances."
plexity is the result of an infinite number and variety of forces, operating upon the production of every result.
In mechanical science the mind begins with a simple proposition, and proceeds constructively to the production of the highest results, while in the uncertain sciences of which political economy may be reckoned, the foremost, this method is impracticable, indeed, impossible. Beside the wheel, the lever and the wedge, the machine society reckons among its primary powers many moral forces, not to be guaged and coupled by arbitrary will, but acting with a certain self-direction, without the range of human control, and frequently of human observation.
The spirit of the age has pronounced against forms and complexities. It does not place man in the presence of the productions of a vast genius, superior to human, and command his study and admiration, but takes him to a vast engine room, and placing in his hand a lever, tells him that with it, the course of all things under the sun is controlled. It tells him that institutions and religions are instruments of his invention, and subjects of his control, and surely he should understand
the tools with which he works, or throw them aside and invest others within his comprehension. It denies to him no attribute of power, save the origination of his own species, and a certain minor authority which nature, as his house-keeper, garnishing and fitting his terrestrial abode for his comfort and pleasure, exercises within this his home and workshop. Since Lucifer fell, such presumptuous beings as the modern philosophers have not existed.
The approach to a philosophic comprehension of the science of political economy, lies through a state of mind as different from this as wisdom is from ignorance. There are certain great principles to be borne in mind-all economic systems have certain moral tendencies which it is as legitimately their office to exert, as to effect those physical and immediate results which are the apparent objects of their institution.
Therefore, to adapt a system to the moral nature of man, is as essential as it is to construct it on such principles as to improve his physical condition. If it were otherwise, the argument so often used to vindicate tyranny that its subjects are better provided for in physical necessities and comforts, would be unanswerable. Again, let it be remembered that when experience has demonstrated the utility of a certain expedient, a fact has been ascertained which must have its place and weight in science, and if it is inapplicable or untrue to any theory of the subject, the theory gives way and not the fact. For certain expedients are as natural and as necessary by adaptation to the condition of man as the faculties he possesses; they indicate the laws of his state.
Of this nature is credit, morally the placing of faith and confidence by one in another, and physically the transfer of one's possessions to another on the faith of a promise of a compensating return for them. Without exercising it man has never existed and can never exist. It is the first law developed in infancy, and draws after it the social affections which have their origin in confidence, first exhibited toward them to whom we are the objects of care and solicitude, and with the perfecting of the reason drawing within its influence a widening range of objects.
Mingling every where in the intercourse
of rational man with man, it is necessarily the great principle governing that intercourse, which has for its end the production by his industry of those things of which his nature has need for its susten
Credit is the great law of industrial intercourse. It is the result of the moral nature of man bearing upon his physical labors, and gives to his labors a moral tone, distinguishing them from and dignifying them above the labors of inferior and irrational beings. It binds society together in mutual confidence and dependence, thus harmonizing in the common objects to which all legitimate institutions tend.
We hear of friends and enemies of a credit system; but it surely cannot be that there are any who desire the extirpation of confidence from the human bosom. It is not against the principle of credit that any sane man wars; but that which has been technically called the credit system, is sometimes the object of his aversion. Essentially, the credit system consists of a series of restrictions to the natural and unrestricted application of the principle, or rather instinct of confidence, settled by long experience. Whether these limits are always set with due regard to the best interest of society, is a question for experimental solution, defying theoretic analysis. There is a reason running through this subject, ascertaining by fixed laws every result, but the question to be settled is whether the human mind possesses sufficient ubiquity to comprehend it.
For the present we must be content to study this faintly illumined science by the aid of certain fixed facts, like beacon lights, set hither and thither to guide the mariner. And if we think more perfectly to illuminate the subject, we must not go about and extinguish the imperfect lights we already have, until by their aid we have set durable landmarks.
Starting from the idea of credit as a moral instinct, we follow man into society and find the idea practically employed by a necessity inherent in his relations with other beings. He comes into the world naked and destitute-is sustained by affection until the faculty of laboring for himself is developed-thence-forward he is thrown upon his own resources. He possesses as yet only the faculty of labor, but
is without the means of employing that faculty. His instincts and his wants impel him to production. The question here arises of what does he stand in need-and how shall that want be supplied?
Man is in a peculiar though not altogether exclusive sense, as has been said, a tool using animal. Most inferior animals to a certain extent require material with which and upon which to exert those instincts which tend to sustain and perpetuate the life of their species; but the wants of man in this respect are as much greater as his nature is more exalted than theirs. That which has already been produced out of the abundant stores of nature, and remains unconsumed, in the various forms in which labor has prepared it for future use, forms the store out of which he is to draw the means of employing his industrial power. This resource is capital, under which name may be also included those natural objects and productions which are the subjects of property.
Out of it, the laborer is nourished until the fruit of his labor is realized to him. Out of it he is furnished with land to till and implements of husbandry, or with material tools and implements with which he can exercise his skill as an artizan.
As yet the naked laborer has produced nothing, and accordingly has nothing with which to produce. Capital is in the hands of those who have produced it, and how can he hope to obtain it without an equivalent to offer for it, from those who have labored hard enough to get it to know the value of keeping it. Until the expedients of humane and civilized society are adopted, he has but a single resource, and that is to sell his labor to another, and become a bondman.
It is an instructive though a well known fact, that the modern commercial system was ushered into being about the same time with that liberty and civilization, which distinguishes the present as the enlightened age of the world. It would be more difficult than profitable to endeavor to ascertain which led forward the other; it is enough to know that without the other neither could subsist.
For much of the liberty and civilization we enjoy, we are indebted to those causes which give dignity to labor. Among barbarous tribes labor is the service of a bond
man reluctantly yielded to avoid hunger and the thong-with freemen it is the struggle of a free spirit to raise its physical independence to the level of its moral. The difference between the two lies not in the men, but in the institutions of the society in which they live.
By assuring to the individual the products of his labor, and furnishing him with capital to employ it, we most effectually secure his physical and with it his moral liberty. By the aid of credit, one of its predominant ideas, modern civilization secures this happy result, not perfectly indeed, but to a degree, establishing on a sure foundation the soundness of the principle involved.
The study of economic philosophy is directed to the best mode of applying capital to labor, so as to insure its highest productiveness. Capital contains within itself no power of increase, apart from labor both are equally helpless, but combined they become productive. The capitalist desires that his capital may be productive, as heartily as the laborer, that his labors may be crowned by production. Their interests are common, and in a well ordered community their efforts tend to the same objects. Then let the senseless cry about a strife between capital and labor, as between natural enemies, apply itself to a simple fable teaching the importance of every useful member of living society to every other, and be silent.
To accomplish the common purpose of the capitalist and the laborer, it is only necessary that the capitalist, or he who has more capital than he either can employ, or than he chooses to employ in connection with his own labors, should loan the laborer so much of his capital as the latter may stand in need of, upon the faith of a promise to restore it again to the lender, with a certain proportion of the profits produced with it, by way of compensation for its use. This is credit representing the confidence of the lender in the borrower.
Need it be asked-can any other result take place? Not unless the instincts of humanity are crushed, and men apart through a wilderness world, devouring one another like wild beasts. So far we have the imperfect credit system of a scattered primitive society. Complexities are begotten in multitudes. It is true, in
deed, that in perfection there is much of simplicity, but it is oftentimes a simplicity pervading complexity as its reason or law, as the vibration of a thousand strings and pipes may produce a simple melody. But we usually call that simple, which is obvious to our reason, and that complex which we do not understand, as a millwright would call a cotton mill a simple machine, while to one unacquainted with its principles, a steam engine is a miracle of complications.
The progress of society towards its complete development, and the increase of population, mark important changes in the relation of the capitalist and the laborer. No longer can the capitalist who has stood hitherto in the light of a patron to the laborer, advancing to him his capital through a kind of personal confidence, exercise that direct watchfulness which is essential to the safety of his investment. To apply a system of direct patronage in an advanced commercial community, would require a degree of intimate knowledge and of personal confidence between individual capitalists and laborers utterly unattainable. Under such a system the capitalist would prefer to let his capital remain idle, rather than incur the difficulties attending its investment.
thus performing for the combined capital that which neither of the associated individuals could do so well with respect to his individual proportion. We have thus attained the idea of the joint stock bank, an institution created in the effort of capital, to apply itself to labor. This is indeed the simplest idea of a bank; but a bank, nevertheless; exhibiting in the simplicity of its mechanism, the principles of its construction, wherein we may derive certain and valuable knowledge of what a bank is, thus leading to the conclusion of what a bank should do.
Individual or private banking has found admirers, placing it in point of utility be fore joint stock banking; but although they have professed to look from a democratic point of view, they have unreflectingly fallen into a great error. An individual banker starting in such a way as to attain success, begins necessarily with an overgrown capital, which grows exorbitantly by the influence which wealth and the control of a banking institution confer. til the mass of capital distributed in small amounts through the country is brought forward by associative companies, the wealth of the individual banker enjoys a monopoly of the benefits derived from the active employment of capital, and receives a rate of interest enhanced beyond its comparative value, by the absence of competition. Europe exhibits many instances where individual bankers have attained a degree of wealth utterly disproportional to what a natural increase of capital by the ordinary and healthy modes of application would yield, and suggesting that such faThere is a want of economy also discov-cilities of monopoly ought not to exist in ered in this mode of applying capital. The borrower and the lender know not where to find each other, nor can that certainty of assistance, which is essential to the regularity of business, be depended on. Out
A further difficulty is perceived. With the increase of commerce has arisen competition begetting risk. The capitalist having but a small amount to loan and hazarding it all with the success of one, or at best a limited number of laborers, finds the risk too great for the return he can expect, and prefers hoarding to investing.
of this doubtful state of things, it happens that much capital lies continually unemployed, particularly when it is possessed in small amounts, in the hands of many individuals.
To obviate these difficulties, a number of individuals, each having a certain, perhaps small amount of capital, associate themselves together and form a common fund. Skillful and experienced persons are employed to make loans of this fund,
the hands of individuals unchecked by competition. Our own country exhibits few such instances, owing chiefly to the extent to which joint stock banking is encouraged with us. Individual banking, tends necessarily to accumulation and monopoly-while joint stock banking tends to distribution, and fosters competition.
Taking a step further in the refinement of the relations of commerce, we encounter a class of persons who assume an intermediate position between the capitalist and the laborers. This class is composed of what has been styled exchangers, including merchants, brokers, carriers and others that might be named. Historically con
sidered, this class dates its origin from a period far in advance of the conception of any definite idea of banking, but in the development of credit from its rude beginning to its later perfection, it may not be inappropriate to assign to this class the position we have assigned it.
The merchant standing in the closest intimacy of relation on the one hand to the laborer, and on the other hand to the capitalist, is the natural channel through which capital flows to invigorate labor. Apparently he seems to monopolize in himself, the advantages derived from banking accommodation; but in reality he transmits them, either immediately or mediately to the laborer. And this again, is accomplished through credit. The manufacturer, who in one sense represents labor, is enabled through the merchant to receive the proceeds of his labor, in the form of advances, months before his manufactured wares find a consumer. To the bank, which has communicated to the merchant in part his ability to make such advances, the manufacturer owes the supply of means which has kept his wheels in motion. So with the farmer, by the aid of capital flowing toward him through the bank, and the merchant, he is sustained out of his own labor, while as yet the products of his industry are but seeking a market.
In this manner may the operation of credit be traced through every branch and department of industry, conveying capital to fructify labor.
Corresponding to a certain degree to the division indicated by the classification of the persons engaged in commerce into capitalists exchanges and labors; there are three classes of individuals whose relations to each other indicate the character of the credit system.
They are firstly capitalists, or those who employ their capital in making loans to others; secondly, those who have capital employed by themselves in commercial operations, corresponding with this class of exchangers; and lastly, laborers who are dependant upon the former classes for the means rendering their labor productive.
Let A. represent the capitalist; B. the merchant standing in the second class, and C. the laborer. We will assume that B. possessing capital employed in his business, has goods of which C. stands in need to
employ his labor. B. is willing to place his property at the disposal of C. but has demanded a guaranty, which is furnished by A. But B. possessing capital and not standing in need of A's ready money, is content to take from A. his promise to pay the equivalent for the purchase by C., at a future specified time. This transaction constitutes a loan of credit, and derives the reasonableness and utility of such loans from the natural wants of mankind standing in such relations.
This simple formula illustrates many of the transactions of business, and can be applied in the analysis of the relations of the parties to such transactions. We have thus as the purpose of the credit system, the facilitation of exchanges of property between producers and exchangers, by setting apart a portion of the capital of the country, to guaranty the credit upon which such exchanges are made.
To a limited extent, loans of credit are created by issues of bank paper, but the immediate convertibility of such paper into specie, gives to it the character of a representative of specie rather than of credit. In either aspect such issues are legitimate.
The invention of a circulation, making use of paper notes as the representative of capital, or in ordinary though less strict language, of specie, belongs to the later history of banking. The inconvenience of removing material property of any kind, from place to place, even when it is in the concentrated form of the precious metals, suggests to the common reason of mankind, the expedient of representing such property by some known symbol, the possession of which shall be the evidence of the ownership of that which it represents. Such is the relation that a bank note sustains to the capital of the bank issuing it.
Economists have differed widely in their notions of the character of specie; but without reason, for specie is but a description of property selected for that purpose in consequence of its extreme value, with a fixed national standard of measurement, and made a lawful tender, in fulfilment of all contracts not calling for the delivery of any other specified property.
Specie has a material and not representtative character. Its value is indeed enhanced by the privileges, which in this