CHAPTER XVIII.-BANKING SYSTEM.*

IN new countries, one of the chief difficulties with which a civilized population is obliged to contend, after a sufficiency is obtained of the necessaries of life, is in appropriating a portion of their capital, to serve as a common standard of value in the transactions of commerce. Barter, which is always the first process, soon becomes too burdensome, and the precious metals, which, in older countries furnish a sound and universal currency, are too expensive for new settlements, where all the capital of the inhabitants is wanted in improving the face of the country, and in providing additional comforts, as the community advances in wealth. In the course of time, however, commerce claims a portion of capital, as the medium of exchange; and the struggle commences between the necessity of providing a circulating medium, formed of a material of universal value, and the re luctance to spare for that purpose, capital, which might be exchanged for articles essentially wanted in new countries. Hence it is found, that in new colonies, there is a strong tendency to substitute the credit of public bodies in the place of capital, or in other words, a paper for a metallic currency. The want of capital is so great, and the opportunities of investment so abundant, that the issues soon become excessive; and it is not until the channels of circulation are entirely filled, that the holders begin to look to the fund provided for its redemption; and the first re-action generally results in the depreciation of the currency, and in the universal distress of the community.

In this country, this evil had been so often felt under the colonial governments, and during the revolution, (when the necessity of the public service compelled, if it did not excuse, excessive emissions of bills of credit by the individual states,) that upon forming a government for the United States, after the termination of hostilities, all power over the currency was taken from the state governments; and they were expressly prohibited from coining money, issuing bills of credit, or making any thing but gold and silver a tender in payment of debts.

It was intended to vest in congress the power to establish a uniform currency, instead of the fluctuating medium formerly used; and to place it out of the power of the states, to invalidate or alter the terms of contracts, by tender, relief, or bankrupt laws, or by any tampering with the currency. It was a wise endeavor to elevate the commercial credit of the country, by placing its principles under the guardianship of the national government, and to establish the currency upon an immovable basis, by making it of gold and silver. The effort, though well meant, was, at that period of our history, almost too great for the ability of the country. A

*For this succinct, able, and interesting account of the banking system of the Unit ed States, we have been indebted to the Annual Register for 1831-2, published by Fessenden & Co.

circulating medium composed entirely of the precious metals, could not be furnished, without abstracting too large a share of its capital from active employment.

Certificates of public debt were already too abundant, and the name of continental money was of itself sufficient, to prevent government bills from becoming current. A bank, whose issues should be founded on real capital, convertible at pleasure into gold and silver, would furnish a circulating medium, not so expensive as a metallic currency, and still not liable to the objections made to treasury bills. So long as the credit of the bank should be fully sustained, a large amount of bills would be kept in circulation, and an additional capital provided, on which it might safely discount to a certain extent. The experiment had been already successfully tried, in the bank of North America, chartered in 1781, under the authority of the continental congress. This institution subsequently accepted a charter from the legislature of Pennsylvania, and of course lost its character as a national bank. This step was also unfortunate, as the commencement of state banking, and being speedily followed by the incorporation of the banks of New York and Massachusetts, by the legislatures of those respective states, established the practice of incorporating state banks, upon a footing that could not be overthrown. As these banks were all established on real capital, and were prudently managed, their paper soon formed a large part of the circulating medium; and by the operation of causes more powerful than legislative enactments, a victory was finally obtained over the policy and spirit of the constitution; and a currency, chiefly com, posed of the notes of incorporated banks, was substituted in the place of a metallic currency. With such a circulating medium, it is clear that the state governments, in exercising the power of incorporating banks, have materially diminished the practical control of congress over the currency of the union. These notes, indeed, are not, and cannot be made a legal tender in payment of debts. The federal constitution has there interposed an effectual prohibition. But although the power, which is secured to each creditor, of enforcing payment of his debt in specie, has served as a check to the excessive issue of bank notes, still a paper currency has existed in the United States, which, by dispensing with and superseding the use of the precious metals, has, in fact, compelled every one to receive such currency, in nearly the same manner as if it had been made a legal tender.

The old United States bank, which was chartered by congress in 1791, shortly after the adoption of the federal constitution, by the salutary control it exercised over the state banks, prevented any great and general injury from growing out of this change in the character of the currency. It carefully guarded against all excessive issues by the local banks, and compelled them to make their paper equivalent to specie. Even this check did not always prove sufficient; and the natural tendency of banking institutions in new countries to over issues, was occasionally illustrated by the bankruptcy of country banks, to the great detriment of the mercantile community. When this check was withdrawn by the refusal to renew the charter of the United States bank, in 1811, the evil became incomparably greater. Availing themselves of the pecuniary distress of the government, during the war that ensued, the local banks, out of New England, came to a determination to suspend specie payments, and by con

nually increasing their issues, they finally flooded the country with bank notes, which constituted the sole circulating medium, and which, though nominally convertible into specie upon demand, were in reality at twenty per cent. discount.

Even this currency was received, as if it had been made a legal tender. An outcry had been made against those who enforced the payment of specie, as engaged in a combination to drain the country of the precious metals; and the only alternative presented to the creditor was, a lawsuit in the face of public opinion for his legal rights, or the acceptance of the depreciated paper currency from his debtor.

Protected by this popular prejudice, the banks went on issuing their irredeemable bills, even after the termination of the war; and a circulating medium, altogether without value in other countries, became the currency of the union, with the exception of the eastern states. By the large issues of the banks that had suspended payment, the circulating medium had been so much augmented, that it exceeded the wants of the community, and fell greatly in value,-the whole currency in 1816, being estimated at one hundred and ten million dollars, when forty-five million dollars were all that was needed. This evil was still further aggravated by the diffe rent values of this currency in the several states-being in some five, in some ten, in others twenty per cent, below par, A debtor, therefore, in paying a debt contracted before the general depreciation of the currency, would, in that state of affairs, pay less value than he agreed to pay; and a debtor, by moving from the eastern to the southern and western states, would, in effect, diminish the amount of his indebtedness twenty per cent. Nor was this all. By the federal constitution, it was provided that all duties, imposts, and excises, should be uniform throughout the United States. So long, however, as bank notes were received by the revenue officers at Boston, New York, and Baltimore, the importer at Baltimore during this period paid one fifth, and at New York one tenth, less than at Boston, where bank notes were equivalent to specie.

To permit the longer continuance of this state of things in the face of the constitution, would have been inconsistent with the duty of congress. A remedy was necessary. Congress could no longer regulate the value of the currency, by declaring that current coin in silver and gold should be of a specified weight and purity. A paper was substituted in the place of a metallic currency, and it was essential to obtain a control over the local banks, and to bring their issues within proper limits. This might have been done by positive enactment, or by imposing a stamp duty on bank notes; but in the then existing state of the currency, it was deemed hazardous to resort to direct interference.

It was also proposed to remedy the evil, by investing the receiving officers of the revenue with the power of discriminating between the notes of the several banks. This addition to the power and influence of the reve nue officers was wisely deemed inexpedient, as augmenting too directly the powers of the treasury department; and the short experiment which was made of this mode of controlling the local banks, resulted in bringing into the treasury more than a million of dollars, of what were denominated unavailable funds, consisting of the notes of broken banks.

The only mode remaining consisted in establishing a United States bank, with capital sufficient to control the local banks, which should, by

degrees, compel them to reduce their issues to an amount proportionate to their means, and thus bring the paper currency to the par of silver and gold. This mode was adopted, and the present United States bank was chartered in 1816, for twenty years, with a capital of thirty-five million dollars, to which the federal government subscribed one fifth.

The notes of this bank and its branches were made receivable for any debt due to the United States, and its capital and solidity soon gave a currency to its notes, to the exclusion of those local banks that did not redeem their paper in specie.

They were immediately compelled to reduce their issues with a view to the resumption of specie payments, and within three years after the opening of the United States bank, the currency of the union was reduced from one hundred and ten million dollars, to forty-five million dollars, and made equivalent to gold and silver. The local banks found the United States bank notes were preferred, and they were compelled to furnish as good a currency, in order to preserve those customers who were worth having. Since this restoration of the currency to a healthy state, it has been kept so, by the constant action of the national bank upon all local banks evincing a disposition to depart from the true rules of banking.

Occasional deviations have indeed taken place, as in Tennessee and Kentucky, where the legislatures undertook to create capital by pledging the public credit, and to force an unnatural quantity of bank notes into circulation. These attempts resulted, as was predicted, in the bankruptcy of the banks, and in the general distress of that part of the country. In Kentucky, indeed, the legislature sought to alleviate the distress flowing from this policy, by relief and tender laws. But this only aggravated the evil, and finally produced a contest between the friends of law and order, and the partizans of the 'relief system,' that, for violence and acrimony, has been seldom witnessed in the United States. The relief and tender laws were declared unconstitutional by the state court of appeal, and their advocates, having obtained possession of the legislature, abolished the court, and constituted a new court in its place. The old court, however, refused to yield, and being sustained by the sound part of society, finally prevailed in the contest; and after a conflict of six years, the legislative and executive departments were rescued from the hands of the relief party, and law and justice, which, for a short time, had been driven from the judgment-seat, resumed their sway over the state of Kentucky.

The history of the banking institutions of that state affords a striking illustration of the mischiefs resulting from any interference of a state government with the currency, and furnishes a complete demonstration of the wisdom of the federal constitution, in vesting the whole power over this subject in the general government. During the short period that elapsed between the first usurpation on the part of Kentucky upon this prerogative of congress, and the termination of the contest, the currency of the state was depreciated; private and public credit destroyed; a bankruptcy almost universal produced; the principles of sound morality and civil order disregarded; the most valuable institutions of the state temporarily overthrown; and the community brought to the brink of civil war and anarchy.

The right side having triumphed, means were taken to redeem this depreciated currency; and the notes of the United States bank furnishing a

currency that was universally preferred, the paper of the commonwealth bank was driven from circulation, and gradually redeemed and destroyed, To prevent the recurrence of such a state of things in other states, is one of the objects of a national bank. In a country like this, the temptation to excessive issues of bank paper is too strong to be resisted by banking institutions in the new states, unless they are checked by a vigilant superintendence, beyond the effect of local influence, The United States, at the present moment, furnish a complete epitome of the progress of civilization in a wilderness, and until the whole continent shall be occupied, this republic will always possess within its limits all the varieties of human society, in its advancement from the savage to the civilized state. On the Atlantic coast are cities and states, which, in commerce, in capital, and in all the productions of wealth and skill, are not far, if at all, behind those of Europe. Advancing through New York and Pennsylvania, a traveller enters the new states beyond the Alleghanies, and although Cincinnati, Lexington, Louisville, and Nashville are inferior to but few cities on the sea-coast, still the population is not so dense, and the country shows fewer signs of cultivation. The roads become worse, the towns smaller, until in the far west he comes upon the log hut, the half-cleared field, and finally reaches the ultima Thule of civilization, in discovering the trapper's tent not far distant from the Indian's wigwam. The effect of this condi tion of society, upon the internal commerce of the country, is striking and characteristic. In settling in the interior, whether in one or more families, the whites take with them little more than their clothing, furniture, agricultural implements, and a small stock of domestic cattle.

In a few years, the fertility of the soil enables them to send surplus produce, in exchange for European or West India productions, to the stores of the country traders in some neighboring town, who, in their turn, transport it to the sea-coast, for home consumption or exportation. In this manner an active trade is maintained between the seaports and the interior, and as the new settlers stand in actual need of many foreign articles, which they require on credit, to be paid for from the next year's crop, it follows, that the interior is invariably in debt to the merchants on the seaboard. These debts, however, they are enabled to discharge, through the great fertility of their soil, and the advance of their property in conse quence of the improvement of the country; and contrary to an old maxim, they grow rich, although they continue in debt-that is, they are daily augmenting the value of their farms, and each year they are enabled to purchase some additional comfort or luxury, which they do not hesitate to buy on credit, because they are certain of being able to pay for it before the lapse of another year.

The invariable course of business between old and new countries-always showing a balance in favor of the former, and bringing the latter in debt-demonstrates, that this habit is beyond the reach of legislation.

The truth is, that new countries are deficient in capital. They are in ⚫ want of all the luxuries, and many of the necessaries, to which the emigrants were accustomed at home. They, however, advance in wealth and population faster than older states, and for the advance of capital, or the credit which they require, they are able and willing to pay. Thus both parties are satisfied with their mutual relations of debtor and creditor, and find their respective interests promoted by the proper adjustment of these