LJ

PRELIMINARY OBSERVATIONS.

ALL the banks of the United States are joint stock companies, generally incorporated by the special laws of the several States; in a few late instances established in conformity with the provisions of a general law. In neither case are the shareholders responsible beyond the amount of the capital subscribed. All these joint stock companies are banks of deposit, discount, and issue; they all discount negotiable paper, purchase and sell domestic and occasionally foreign bills of exchange, receive deposits, or open cash credits to individuals, and issue bank-notes, always, nominally at least, payable on demand in specie.1 These notes have become the local and sole currency of the several places or sections of country where they are respectively made payable. Banking in America always implies the right and the practice of issuing paper money as a substitute for a specie

currency.

On the 1st of January, 1830 and 1840, respectively, the capital, liabilities payable on demand, and resources, of all the chartered banks in the United States were, as far as can be ascertained, nearly as follows, viz.:

1 Post-notes, not payable on demand, may be sold and purchased as other negotiable paper, vary in value, and do not form part of the currency

proper.

VOL. III.-25

369

There can be no doubt that in their origin the banks were instituted for the purpose of affording accommodations to the commercial interest, and of supplying the want of a capital proportionate to the extent of the legitimate commerce of the country. The prodigious increase of banking capital and accommodations within the last ten years, so much exceeding that which might be actually wanted for promoting the productive industry of the country, has been attended with consequences affecting all classes, and so fatal, in reference to the currency, that it appears proper, in the first place, to ascertain what are the benefits actually bestowed on the community at large by the substitution of a paper for a specie currency: and these advantages must be reduced to their true value, by distinguishing those which belong exclusively to the issues of paper money from those which might be equally enjoyed with banks and bankers issuing no paper currency and carrying on every other species of banking operations.

These advantages appear to be, commercial punctuality, and the facilities afforded in effecting payments, collecting debts, and making remittances; the conversion of unproductive into productive capital; the saving of a capital tantamount to the enjoyment of an additional capital, and bearing a certain proportion to the amount of paper issues. All but the last might be equally attained with banks or private bankers who issued no paper

currency.

Punctuality in fulfilling engagements should be practised by all; but it is essentially a commercial virtue. Credit, at least to a certain extent, is absolutely necessary to commerce. Every merchant must for the fulfilment of his own engagements depend principally on the punctual payment of the debts due to him. This punctuality is so necessary, and the advantages derived from it have become so habitual, that the memory of its origin may be lost. It was indubitably due to the establishment of banks. At the close of the war of Independence, Philadelphia was the only place in the United States where commercial punctuality was general, and that city was indebted for it to the Bank of North America. The same effect was successively produced, as banks were established, in New York, Boston,

Baltimore, and the other commercial cities; and finally almost universally, or wherever country banking has penetrated.

It must be observed that a very small banking capital was sufficient for that purpose, since that object was attained in each of the several commercial cities by a single bank with a capital of not more than five to eight hundred thousand dollars. The merchant who did not pay his discounted note could no longer receive accommodations from the bank; and the protest of a note, either discounted or placed in the bank for collection, became soon sufficient to prostrate his credit. But the result would have been the same had the bank been only one of deposit and discount and not of issue. Commercial punctuality is as indispensable and universal in all the cities of continental Europe as in America, though no banks of issue existed there except in Amsterdam, in Paris, and very lately in some other towns of France. This great advantage, though it had its origin here in banks of issue, is not one which belongs exclusively to such banks.

The same observation will apply to the conversion of unproductive into productive capital, which has been effected by our banks. Every merchant, every person who enjoys or earns a certain income, always keeps on hand a certain amount of currency proportionate to his engagements, to his wealth, and to his wants. So long as it remains in his possession it is altogether unproductive. Deposited in bank, it becomes a part of the funds applied by the banks to discounts, or, in other words, to advances made to the commerce, manufactures, and generally to the productive industry of the country. But in order to produce that effect it is sufficient that the bank should be one of deposit, and not that it should issue bank-notes. Throughout Europe the same description of persons who here make deposits, or, which is the same thing, who keep an account with our banks of issue, do deposit or keep an account with private bankers who issue no bank-notes. And those bankers give the same facilities in effecting payments, collecting debts, and making remittances which are afforded by the American banks of issue.

It is therefore principally, if not exclusively, in the substitution of a paper currency, which costs little or nothing, for one in gold

and silver, which has an intrinsic value, that the benefit derived from the paper issues does consist. The actual circulation of all the banks in the United States does not, when in a healthy situation, much exceed eighty millions of dollars. Deducting twenty millions in specie, which the banks must keep, on an average, to meet demands on that part of their liabilities, there remain sixty millions, which, instead of being applied to the purchase of gold and silver currency, are applied to productive purposes, and add as much to the productive capital of the country. It may already be inferred that the deposits must not be included in the computation, and that the profit consists only of the difference between the actual issues and the specie kept to meet demands on that account; but this branch of the subject requires further explanation.

The exchange of the commodities produced in different countries, or in different districts of the same country, is the basis of all the commercial transactions between those countries or districts. As that commerce becomes more extensive and regular, the principle of the division of labor is applied; the purchase and importation of the foreign and the exportation and sale of the domestic commodities given in exchange become distinct branches of business; masses of respective credits and debits are created; and by far the greater part of the actual payments is effected by the transfer of those credits through the medium of foreign or domestic bills of exchange.

A small portion only is paid in currency, for when the balance of indebtedness is large an extension of credit is generally granted. In large transactions, even not of a commercial nature, such as the purchase of land, it will be found that the payments are also principally made by the transfer of credits accumulated for that purpose, and rarely to a large amount in specie.

The deposits in banks are but occasionally made in specie. They generally consist of transfers of credit from banks, or arise from a note owned by the party and discounted in his favor. Whatever their origin may be, they are credits opened in the books of banks in favor of individuals to whom they are payable on demand. And as payments between country and country or district and district are effected by the transfer of credits

through the medium of bills of exchange, so also payments in all the transactions of any importance between inhabitants of the same city or district are effected by checks on the banks, that is to say, by the transfer of those bank credits which are called deposits.

These checks, like bills of exchange, may be considered as a substitute for currency, or as a special currency between dealers and dealers when the credit in bank (deposit) is in favor of a dealer; between consumers and dealers when the deposit has been made by a person not in active business. They differ from bank issues in that they are not received, as bank-notes are, as a full payment of a debt, and that if not paid by the bank the drawer is still responsible. The bank-note is taken in payment solely from the general confidence reposed in the bank; the check, from the special confidence placed in the drawer.

In

But the deposits or cash credits on the books of a bank are a liability of the bank, payable on demand, like bank-notes. reference to such bank, the actual issues and deposits, though not always pressing on it at the same time and to the same extent, are liabilities of the same nature, and for which provision must be equally made.

Of the great benefits derived from these deposits, considered as substitutes for currency and effecting payments with much greater facility than can be done with the precious metals, there can be no doubt. The perpetual transfers of twelve millions of dollars of individual deposits, that is to say, of credits in favor of individuals, in the several banks of the city of New York, together with one or two millions of notes of a large denomination which pass daily from bank to bank and make no part of the general circulation, are sufficient to effect annually payments amounting to about twelve hundred millions. It appears by the late statements of the Bank of France that although the private deposits of that institution do not exceed seventy millions of francs, the transfers (mouvemens) of these were sufficient to effect, in six months, payments (liquidations) amounting to seventeen hundred and forty-two millions. By an analogous though not perfectly similar process, the actual daily payment of an ultimate balance of two or three hundred thousand pounds in specie