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THE UNITED STATES
APRIL 1, 1826.
Remarks on the Banks and Currency of the New England States; in which an Attempt is made to show the Public Benefits resulting from the System pursued by the Allied Banks in Boston. First published in the Boston Daily Advertiser. Boston. 1826. 8vo.
THIS judicious little tract relates to banking operations of very extensive influence upon the paper currency of New England. The subject has been much discussed in the newspapers, sometimes by impartial, but more often we apprehend by interested persons. Among the mercantile classes, it has, of course, been regarded with deep attention, and with friendly or hostile feelings, according to the situation of individuals. We consider it one of those phenomena in the commercial world, which, however local and temporary in character, deserve mature reflection as questions of political economy.
The object of the tract is to collect certain of the facts, and to present in a connected view, the reasons which tend to vindicate the policy pursued by the Allied Banks. These facts and reasons, it appears to us, make out a conclusive defence of their system, so far as the public good is concerned. We think a few plain statements will exhibit the truth in a clear light.
A common bank-note is the promise of the bank to pay so much money to the holder on demand. Of itself, it possesses no value. Its general currency arises from the faith of the public in the ability of the bank, which issues it, to redeem it with specie, according to its tenor; and in its superior convenience to gold and silver as a medium of exchange. The currency of the notes of a particular bank at a particular place will depend partly
upon the nearness of the bank to that place, as well as upon the credit of the bank. The more remote the bank, the more difficult is its convertibility into specie, and the greater, on that account, its depreciation below par value.
Within the immediate sphere of any great commercial city the value of foreign bank-notes will be governed mainly by their value in that city. And the accumulation of capital in such a place, united with its wide-spread dealings, and the better knowledge of banking likely to exist in it, must of necessity give superior value to its bank-notes, if business be left to regulate itself.
Hence the distinction between foreign money and home money, which makes the former pass in exchange at a discount from its nominal value.
Now previously to a year ago the state of the money market in Boston, which controlled that of the banks in its immediate vicinity, was, on this account, extremely inconvenient to the whole community. The remote country banks made immoderate issues of bills, which they forced into the market, by the agency of brokers. These bills circulated as the ordinary currency of trade, in full credit, but were refused at the Boston banks either as deposite or in payment of debts. The consequence of this was, that Boston bills never remained in circulation. Merchants being obliged to deposite or pay them alone at the Boston banks, they were bought up at a premium for that purpose, while foreign bills were the universal medium of traffic. All payments to merchants in Boston, made by retailers in the country, were in this degraded currency, as were all ordinary small transactions among persons in Boston. The rate of discount at which foreign bills were bought and sold, that is, the premium on Boston money, varied at different periods from two per cent. to a half or three fourths of one per cent.; and the amount daily exchanged is rated in the pamphlet before us at a hundred thousand dollars. The evils of this state of things were great and numerous. It evidently impeded the operations of trade, by creating a necessity for an additional exchange. It occasioned a great loss to the city merchant in the premium paid by him for Boston bills. A single merchant has been known to pay eighteen hundred dollars in one year for exchanging current money. This loss, too, went to give the foreign banks, whose notes were at a discount, a most iniquitous species of gain. They themselves bought their own bills at a discount, and immediately issued them again at par; thus deriving profit from the very debasement of their notes. Again, a part of the profit of banking, it is well understood, is the saving
of interest on money by the issue of bank-notes to represent it. Now the system, which we have described, tempted the foreign banks to force their notes into circulation, beyond the amount of their capital or their ability to redeem. Many of them, of course, became bankrupt, with a large quantity of their paper in circulation, to the heavy loss of the public. Examples of the fact occur in the cases of the Northampton, Hallowell and Augusta, Penobscot, and Berkshire banks.
Now the remedy for all these evils, and others which might be enumerated, was apparent. It was to raise the foreign bills to par. And the mode of effecting this important end was perfectly simple. It was for the Boston banks to accept the country notes in payment of debts or in deposite, which would at once annihilate the distinction between foreign money and city money. All would then be alike, and all equal to specie. Eight of the Boston banks associated to adopt this course. We copy their arrangements from the pamphlet before us.
They simply agreed each to receive at par in all payments from their customers, the bills of all the banks in good credit in the New England states; thus making country money equal in value to Boston money, and saving to their customers the tax heretofore levied in the shape of a premium for Boston money. It would not of course be expected that the bills so received would be held on hand for a long time, or that they would paid out again to supply the circulation of the town. Nor was it necessary that each bank should employ its messengers in carrying the bills home. An agreement was therefore made, that the Suffolk bank should take the sole charge of carrying the bills home, or procuring them to be redeemed in such manner as they should see fit. The country bills received by the other allied banks, in pursuance of this agreement, are daily paid over to the Suffolk bank, and received by them at par, as so much Boston money. The money so received by the Suffolk bank, must necessarily absorb a considerable amount of its capital. To indemnify it for this investment of capital, and for the expenses of procuring the country bills to be redeemed, the allied banks each lend to the Suffolk bank, without interest, a sum of money agreed upon, as an equivalent for the sacrifice. This we understand to be the nature of the Holy Alliance of banks, against which so many attempts have been made to excite the prejudices of the community. It is an arrangement of perhaps doubtful advantage to the parties, so far as direct pecuniary emolument is concerned, but of vast benefit to the public, in facilitating the transactions of business, in protecting a portion of the community from a constant and most unreasonable tax, and the whole community against occasional enormous losses.