Democratick Editorials: Essays in Jacksonian Political Economy
Separation of Bank and State
BANK OF UNITED STATES
Evening Post, date uncertain. Sedgwick gives simply "March, 1834." Attempts to locate the original have been unsuccessful.
In answer to the many objections which are urged with great force of argument against the United States Bank, and against any great national institution of a similar character, there is little put forth in its defence, beyond mere naked allegation. One of the assertions, however, which seems to be most relied upon by the advocates of the Bank, is that it has exercised a most beneficial power in regulating the currency of the country. Indeed, the power which it was supposed it would possess to regulate the currency, furnished one of the chief grounds of the support yielded to the original proposition to establish a United States Bank, and the same topic has occupied a prominent place in every subsequent discussion of the Bank question in Congress. It is maintained, in favour of the present institution, that it not merely possesses that power, but that it has exerted it in the most prudent and salutary manner. This is made the theme of many high-wrought panegyrics. It is triumphantly put forth by the journals in the interest of the Bank; it drops from the lips of every Bank declaimer at political meetings, and is asserted and re-asserted by all the orators and editors of the Bank party, with a confidence which should belong only to truth. Many persons, indeed, who are strongly opposed to the United States Bank on moral grounds; who view with dismay its prodigious means of corruption; and shudder with abhorrence at the free and audacious use it has made of those means; yet accede to it the praise of having at least answered one great purpose of its creation—namely, the regulation of the currency of the United States.
It is to be feared that men in general have not very precise notions of what constitutes a regulation of the currency. If the meaning of this phrase is to be limited to the mere sustaining of the credit of the Bank at such a point, that its notes shall always stand at the par value of silver, then indeed must it be admitted that the United States Bank has, for the greater part of the time performed its functions in that respect. Yet no praise is to be acceded to it on that score; since such an effect must naturally and almost inevitably flow from the self-imposed obligation on the government to receive its notes at their nominal amount, at all places, in payment of debts due to the United States. There is not a bank in the country, accredited and endorsed by the Government to an equal extent, that would not as certainly maintain its paper on a par with the precious metals. Indeed, most of the well-conducted institutions in the Atlantic cities, without the advantage of such countenance from the Government, have preserved their paper in equal credit; or, in other words, have been equally successful in regulating the currency, so far as the term implies the affording of a convertible paper substitute for money, which shall pass from hand to hand as the full equivalent of silver coin. The doing of this certainly constitutes an important branch of the regulation of the currency; but there is another and more important branch, and in this the United States Bank has totally and most signally failed.
What is regulating the currency? It is the furnishing of a medium of circulation, either metalic or convertible at par, equal in amount to the real business of the country, as measured by the amount of its exports and the amount of actual capital employed in commercial business. It is the furnishing of that amount of circulation, which is actually absorbed by the commercial transactions of the country—by those transactions which rest on the basis of the exchange continually going on of the commodities of one country for those of another. When bank issues are limited within this circle, the notes of the bank in circulation are founded on the security of the notes of merchants in possession of the bank, and the notes of the merchants rest on the basis of goods actually purchased, which are finally to be paid for with the products of the soil or other articles of export. The maintaining of the circulation at this point would, in the strict and proper sense of the word, be regulating the currency. It would be supplying the channels of business to the degree requisite to facilitate the operations of commerce, without causing those operations to be unduly extended at one time, and unduly contracted at another. It would be causing the stream of credit to glide in an equal and uniform current, never stagnating, and never overflowing its boundaries.
When bank circulation exceeds this measure, an inevitable derangement of the currency takes place. The par of value between the paper representatives of money and money itself may still be maintained; but prices are raised, and raised unequally, and the dollar no longer accurately performs its office as a measure of value. The effects of the expansion of the currency are first seen in the rise of the prices of foreign fabrics. This leads to excessive importation on the part of the competitors anxious to avail themselves of the advance. Goods are purchased from abroad to a much larger amount than the exports of the country will liquidate, and a balance of debt is thus created. The payment of this balance drains the country of specie. The bank, finding its paper return upon it in demand for coin, is obliged suddenly, in self-defence, to curtail its issues. The consequence of this curtailment is a fall of prices. Those who had ordered goods in expectation of deriving the advantage of the high prices, are obliged to sell at a sacrifice, and are fortunate if they can dispose of their commodities at all. Those who had been deluded, by the fatal facility of getting bank favours, into extending themselves beyond the limits of that fair and prudent credit to which their actual capital entitled them, must necessarily be unable to meet the shock of a sudden withdrawal of the quicksand basis on which their business rested, and are thus compelled to become bankrupts. A state of general calamity succeeds—most severe in the commercial cities, and measured in all places by a rule of inverse ratio to the excess of the preceding apparent prosperity. These sudden expansions and contractions of the currency have happened too frequently in this country, and have been followed by effects of too disastrous a nature, for any reader to be ignorant of them.
Has the United States Bank never caused distress of this kind? Has it never caused the amount of circulating medium to fluctuate? Has it never stimulated business into unhealthy activity at one time, and withheld its proper aliment at another? Has it never poured out a sudden flood of paper money, causing the wheels of commerce to revolve with harmful rapidity, and then as suddenly withdrawn the supply, till the channels were empty, and every branch of business languished throughout the land? There are few of our readers who cannot, of their own knowledge, answer these questions in the affirmative.
For the two or three years preceding the extensive and heavy calamities of 1819, the United States Bank, instead of regulating the currency, poured out its issues at such a lavish rate that trade and speculation were excited in a preternatural manner. But the inevitable consequences of over issues did not fail to happen in that case. A large balance of debt was created in Europe, and to pay that debt our metalic medium was sent away from the country. The land was soon nearly exhausted of specie, and still the debt remained unliquidated. The bank, in order to bring business to an equipoise again, exchanged a part of its funded debt for specie in Europe, and purchased a large amount of coin in the West Indies and other places. But it still continued to make loans to a larger degree than the actual business of the country, as measured by the amount of its exports, required, and its purchase was therefore a most ineffectual and childish scheme. It was but dragging a supply of water with much toil and expense, from the lake of the valley to the summit of an eminence, in the vain hope that, discharged there, it would continue on the height and not rush down the declivity, to mix again with the waters of the lake. The specie, purchased at high rates in foreign countries, was no sooner brought to our own, and lodged in the vaults of the bank, than it was immediately drawn thence again, by the necessity of redeeming the notes which poured in upon it in a constant stream in demand for silver. In one year, 1818, upwards of fifteen millions of dollars were exported from the country, and still the debts incurred by the mad spirit of overtrading were not liquidated. The bank itself was now on the very verge of bankruptcy. At the close of its business on the 12th of April, 1819, the whole amount of money in its vaults was only 71,522 dollars, and it at the same time owed to the city banks a clear balance of 196,418 dollars, or an excess over its means of payment of nearly 125,000 dollars. A depreciation of its credit was one of the consequences which had flowed from this state of things, and the notes of the United States Bank—the boasted institution which claims to have regulated the currency of this country—fell ten per cent. below the par value of silver.
But the greatest evil was yet behind. The Bank was at length compelled, by the situation in which the rashness of its managers had involved it, to commence a rapid curtailment of discounts. An immediate reduction took place of two millions in Philadelphia, two millions in Baltimore, nearly a million in Richmond, and half a million in Norfolk. This sudden withdrawal of the means of business was, of itself, a heavy calamity to those cities; but the system of curtailment was persevered in, until the foundation of a great part of the commercial transactions of the United States, and of the speculations in land, in internal improvement, and other adventures, which the facility of getting money had induced men to hazard, was withdrawn, and the whole fabric fell to the ground, burying beneath vast numbers of unfortunate persons, and scattering ruin and dismay throughout the Union.
The same scenes, only to a greater extent, and with more deplorable circumstances, were acted over in 1825. There are few inhabitants of this city who can have forgotten the extensive failures, both of individuals and corporate institutions, which marked that period. There are many yet pining in comfortless poverty whose distress was brought upon them by the revulsions of that disastrous year—many who were suddenly cast down from affluence to want—many who saw their all slip from their grasp and melt away, who had thought that they held it by securities as firm as the eternal hills.
But not to dwell upon events the recollection of which time may have begun to efface from many minds, let us but cast a glance at the manner in which the United States Bank regulated the currency in 1830, when, in the short period of a twelve-month it extended its accommodations from forty to seventy millions of dollars. This enormous expansion, entirely uncalled for by any peculiar circumstance in the business condition of the country, was followed by the invariable consequences of an inflation of the currency. Goods and stocks rose, speculation was excited, a great number of extensive enterprises were undertaken, canals were laid out, rail-roads projected, and the whole business of the country was stimulated into unnatural and unsalutary activity. The necessary result of the spirit of speculation thus awakened was the purchase of more goods abroad than the commodities of the country would pay for. Hence vast sums of specie soon began to leave the United States; scarcely a packet ship sailed from our wharves that did not carry out to England and France a large sum of money in gold and silver; and it is estimated that in 1831-32 the specie drawn from the country did not fall short of twenty millions of dollars. The Bank of the United States, failing to accomplish the bad design for which it had thus flooded the country with its paper, now began to try the effects of a contrary system, and resorted to coercion. A reduction of its issues must inevitably have taken place in the nature of things, nor could all the means and all the credit of the Bank have removed the evil day to a very distant period. But it had it completely within its power to effect its curtailment by easy degrees, and to bring back business into its proper channels by operations that would have been attended with little general distress. But this was no part of its plan. Its object was to wring from the sufferings of the people their assent to the perpetuation of its existence. Its curtailments were therefore rapid and sudden, and so managed as to throw the greater part of the burden on those commercial places where there was the greatest need of lenity and forbearance. The distress and dismay thus occasioned, were aggravated by the rumours and inventions of hired presses, instructed to increase the panic by all the means in their power. Of the deplorable effects produced by this course, the traces are yet too recent to require that we should enter into any particulars.
The Bank has not yet exhausted its full power of mischief. Since its creation to the present hour, instead of regulating the currency, it has caused a continual fluctuation; but it is capable of doing greater injury than it has yet effected. It is perfectly within its power to cause a variation of prices to the extent of twenty-five per cent. every ninety days, by alternate expansions and contractions of its issues. It is in its power, in the short period that is yet to elapse before its charter expires, so to embarrass the currency, so to limit the amount of circulating medium, so to impair commercial confidence, and shake the entire basis of mercantile credit, as to produce throughout the whole land a scene of the most poignant pecuniary distress—a scene compared with which the dark days of 1819 and 1825, and those through which we have just passed, shall seem bright and prosperous. And there are indications that the Bank will do this. There are signs and portents in the heavens which tell of a coming tempest. There are omens which foreshow that this mighty and wicked corporation means to use to the uttermost its whole machinery of coercion, to wring from the groaning land a hard contest to the renewal of its existence. We trust the People will bear stiffly up under the infliction. We trust they will breast the storm with determined spirits. We trust they will endure the torture, without yielding to a measure which would destroy the best interests of their country, and make them and their children slaves forever.
Regulation of the currency! What a claim to set up for the United States Bank! It has done the very reverse: it has destroyed the equal flow and steady worth of the currency: it has broken up the measure of value: it has kept the circulating medium in a state of continual fluctuation, making the dollar to-day worth a dollar and a half, and to-morrow not worth a half a dollar. Besides the three great periods of sudden excess and rapid curtailment, its whole career has been one series of experiments, more or less general, of inflation and exhaustion of the currency. And this is the institution, which now comes forward, and claims to be re-chartered, on the ground of having well performed the great offices for which it was created. It has failed in all its great ends. In its chief purpose, as a fiscal agent and assistant of the Government, one on which it might at all times securely rely, it has wholly failed. We have seen it interfering in the national politics, and endeavouring to rule the suffrages of the people, first by bribery and afterwards by compulsion. We have seen it place itself in open defiance to the Executive, and rank him in its official papers, with counterfeiters and robbers. We have seen it endeavouring to thwart the measures of his administration; collude with foreign creditors of the Government to defeat the avowed objects of the Treasury; refuse to give up the national funds at the commands of the competent authority; and finally turn a committee of congress with contumely from its doors, in violation of its charter, and in violation of every obligation of morality and every principle of public decency. This is the institution which now comes forward for a re-charter. If the people grant it they will deserve to wear its chains!
SMALL NOTE CIRCULATION
Evening Post, August 6, 1834. Title added by Sedgwick.
Now that real money has come into circulation—now that the country is plentifully supplied with gold and silver—we trust the friends of a sound currency will take pains, and adopt all proper measures, to banish small notes from use. We call upon every man who professes to be animated with the principles of the democracy, to assist in accomplishing the great work of redeeming this country from the curse of our bad bank system. We never shall be a truly free and happy people while subject, as we now are, to Bank domination. No system could possibly be devised more certainly fatal to the great principle on which our government rests—the glorious principle of equal rights—than the Banking system, as it exists in this country. It is hostile to every received axiom of political economy, it is hostile to morals, and hostile to freedom. Its direct and inevitable tendency is to create artificial inequalities and distinctions in society; to increase the wealth of the rich, and render more abject and oppressive the poverty of the poor. It fosters a spirit of speculation, destructive of love of country—a spirit which substitutes an idol of gold for that better object which patriotism worships—a spirit which paralyzes all the ardent and generous impulses of our nature, and creates, instead, a sordid and rapacious desire of gain, to minister to the insatiable cravings of which becomes the sole aim of existence.
We do not expect and do not desire to overthrow our pernicious Banking system suddenly. We would not, if we could, do aught to infringe the chartered privileges of Banks already existing. Were they ten times worse in their effects than they are, we would not justify a breach of the public faith to get rid of the evil. But we desire most ardently that it may not be permitted to spread more widely. The legislatures may at least say, "Thus far shalt thou go and no further; here shall thy proud waves be stayed." They may refuse to grant any more charters of incorporation, and may take effectual measures to prohibit the small note issues. These measures constitute the proper first step in the great reformation for which we contend, and these measures the democracy of the country—if we do not strangely misinterpret their sentiments—will demand.
But in the meanwhile, the means are within the reach of the people themselves to do much—very much—towards the accomplishment of the desired object. Let employers provide themselves with gold to pay their hands; and let the hands of those employers who continue in the practice, which has been too extensive, of procuring uncurrent money to pay them, take such measures to remedy the evil as are within their reach, and not inconsistent with prudence. The practice is wholly unjustifiable, and stands, in a moral point of view, on a footing not very different from that of clipping coins. The law, however, which we all know is not always framed in the most perfect accordance with the principles of ethics, makes this important difference, that while to the one species of dishonesty it extends full protection, the other it visits with the most ignominious punishment. But though protected by the law, workmen may do much to rid themselves of the evils of this practise, and at the same time forward the great object of democracy—ultimate emancipation from the shackles of a detestable Bank tyranny. Let them remember, when paid in small uncurrent notes, that the longer they retain possession of those notes the greater is the profit of the Bank that issued them, and therefore let them take the best means within their reach of causing them to be returned to the Bank. Every dollar-note in circulation has displaced an equal amount of gold and silver, and, on the other hand, every dollar of gold and silver you keep in circulation, will displace twice or three times its amount in paper money.
Paper money is fingered by a great many hands, as may be easily perceived from the soiled and worn appearance of many of the bills. A cheap, and, to a certain extent, most effectual method of disseminating the principles of those opposed to incorporated rag-money manufactories, would be for them to write upon the back of every bank-note which should come into their possession, some short sentence expressive of their sentiments. For example—"No Monopolies!" "No Union of Banks and State!" "Jackson and Hard Money!" "Gold before Rags!" and the like. When it should become their duty to endorse a bill issued by a Bank, the charter of which was obtained by bribery and collusion, (as many such there be) it would be well to inscribe upon it in a clear and distinct hand, "Wages of Iniquity!"
What we have here recommended may seem to be but child's play; but we are satisfied that if the workingmen, upon whom the worst trash of Bank rags are palmed off, would only adopt such a practice, and persist in it for a short time, they would see the good result. The worst class of uncurrent notes would soon be plentifully endorsed, for it is the worst description of money which is generally bought to pay away to mechanics, in order that their employers may avoid paying them as large a proportion as possible of their just wages. Let them consider the hints thrown out in this article, and they can hardly fail, we think, to perceive, that if generally acted upon, they would have an important effect in assisting the introduction of gold as a currency, in the place of the small note circulation of which there is so much reason to complain.
THE MONOPOLY BANKING SYSTEM
Evening Post, date uncertain. Sedgwick gives simply "December, 1834." Attempts to locate the original have been unsuccessful.
It is a source of sincere pleasure to us to perceive that the attention of the people is seriously awakened to the subject of the Bank system, as it exists in this country. It seems to us quite evident that the sentiment is daily gaining ground that the whole system is erroneous—wrong in principle and productive of incalculable evils in its practical operation. Those who have been readers of the EVENING POST, for the last six or eight months, have had this subject fully and freely discussed, not only in articles from our own pen, but in numerous excellent communications from able correspondents, and, more especially, in the clear, comprehensive, and unanswerable essays of Mr. Gouge, which, with the author's permission, we copied from his admirable work on American Banking.*23 Those who perused these various productions, with the attention which the important and interesting nature of the subject required, have possessed themselves of sufficient materials for the formation of a correct opinion; and we have the satisfaction of knowing that very many of our readers concur fully with us in the sentiments we entertain with regard to our banking system.
We look upon that system as wrong in two of its leading principles: first, we object to it as founded on a species of monopoly; and secondly, as supplying a circulating medium which rests on a basis liable to all the fluctuations and contingencies of commerce and trade—a basis which may at any time be swept away by a thousand casualties of business, and leave not a wreck behind. There are many other objections incident to these, some of which present themselves in forms which demand the most serious consideration.
Our primary ground of opposition to banks as they at present exist is that they are a species of monopoly. All corporations are liable to the objection that whatever powers or privileges are given to them, are so much taken from the government of the people. Though a state legislature may possess a constitutional right to create bank incorporations, yet it seems very clear to our apprehension that the doing so is an invasion of the grand republican principle of Equal Rights—a principle which lies at the bottom of our constitution, and which, in truth, is the corner-stone both of our national government, and that of each particular state.
Every charter of incorporation, we have said, is, to some extent, either in fact or in practical operation, a monopoly; for these charters invariably invest those upon whom they are bestowed with powers and privileges which are not enjoyed by the great body of the people. This may be done by merely combining larger amounts of capital than unincorporated individuals can bring into competition with the chartered institution; but the end is more frequently effected by the more palpably unjust process of exonerating the chartered few from liabilities to which the rest of the community are subject, or by prohibiting the unprivileged individual from entering into competition with the favoured creature of the law.
When a legislative body restrains the people collectively from exercising their natural right of pursuing a certain branch of business, and gives to particular individuals exclusive permission to carry on that business, they assuredly are guilty of a violation of the republican maxim of Equal Rights, which nothing but the plainest paramount necessity can at all excuse. This violation is the more palpable, when immunities are granted to the few, which would not have been enjoyed by the people, had their natural rights never been restricted by law. In the case of Bank incorporations such is clearly true; since those who are thus privileged are protected by their charters both from the competition of individuals, and from loss to any greater extent than the amount of capital they may risk in the enterprise—a protection which would have been enjoyed by no member of the community, had the law left banking on the same footing with other mercantile pursuits. As a monopoly, then—as a system which grants exclusive privileges—which is at variance with the great fundamental doctrine of democracy—we must oppose Bank incorporations, unless it can be shown that they are productive of good which greatly counterbalances the evil.
A second objection to our banking system is that it is founded on a wrong basis—a basis that does not afford adequate security to the community; since it not only does not protect them from loss by ignorant or fraudulent management, but not even from those constantly recurring commercial revulsions, which, indeed, are one of the evil fruits of this very system. The basis of our banking business is specie capital; yet every body knows that the first thing a bank does, on going into operation, (if we suppose the whole capital to have been honestly paid in, which is very far from being always the case) is to lend out its capital; and the profits of the institution do not commence until, having loaned all its capital, it begins to loan its credit as money. No set of men would desire a bank charter merely to authorize them to lend their money capital at the common rate of interest; for they would have no difficulty in doing that, without a charter, and without incurring the heavy expense incident to banking business. The object of a bank charter is to enable those holding it to lend their credit at interest, and to lend their credit too, to twice, and sometimes three times, the amount of their actual capital. In return, then, for its capital, and for the large amount of promissory obligations issued on the credit of that capital, the Bank holds nothing but the liabilities of individual merchants and other dealers. It must be evident then that its capital is liable to all the fluctuations and accidents to which commercial business is exposed. Its integrity depends upon the ability of its dealers punctually to discharge their obligations. Should a series of commercial disasters overwhelm those dealers, the capital of the Bank is lost, and the bill holder, instead of money, finds himself possessed of a mere worthless and broken promise to pay.
Let us trace the progress of a new banking institution. Let us imagine a knot of speculators to have possessed themselves, by certain acts of collusion, bribery, and political management, of a bank charter; and let us suppose them commencing operations under their corporate privileges. They begin by lending their capital. After that, if commercial business is active, and the demand for money urgent, they take care to put as many of their notes in circulation as possible. For awhile this does very well, and the Bank realizes large profits. Every thing seems to flourish; merchants extend their operations; they hire capacious stores, import largely from abroad, sell to country dealers on liberal terms, get the notes of those dealers discounted, and extend themselves still further. Others, in the meanwhile, stimulated by this same appearance of commercial prosperity, borrow money (that is notes) from the Bank, and embark in enterprises of a different nature. They purchase lots, build houses, set railway and canal projects on foot, and every thing goes on swimmingly. The demand for labour is abundant, property of all kinds rises in price, and speculators meet each other in the streets, and exult in their anticipated fortunes.
But by and by things take a different turn. The exports of the country (which furnish the true measure of business) are found to fall greatly short of the amount due abroad for foreign fabrics, and a large balance remains unpaid. The first intimation of this is the rapid advance in the price of foreign exchange. The bank now perceives that it has extended itself too far. Its notes, which, until now, circulated currently enough, begin to return in upon it in demand for specie; while, at the same time, the merchants, whom it has been all along eager to serve, now call for increased accommodations. But the Bank cannot accommodate them any longer. Instead of increasing its loans, it is obliged to require payment of those which it had previously made; for its own notes are flowing in a continual stream to its counter, and real money is demanded instead. But real money it has none, as that was all lent out when it first went into operation. Here then a sudden check is given to the seeming prosperity. The merchants, unable to get the amount of accommodation necessary to sustain their operations, are forced to suspend payment. A rumour of the amount lost by the Bank in consequence of these failures, causes confidence in its solvency to be impaired, and being threatened with a run, it resorts to a still more rapid curtailment. Then follows wider derangement. One commercial house after another becomes bankrupt, and finally the Bank itself, by these repeated losses forced to discontinue its business, closes its doors, and hands over its affairs for the benefit of its creditors, Who are its creditors? Those who hold its money, that is, its "promises to pay." On investigation it is discovered, most likely, that the whole capital of the institution has been absorbed by its losses. The enormous profits which it made during the first part of its career, had been regularly withdrawn by the stockholders, and the deluded creditor has nothing but a worthless bit of engraved paper to show for the valuable consideration which he parted with for what he foolishly imagined money.
What we have here stated can hardly be called a supposititious case—it is a true history, and there are events within the memory of almost every reader of which it is a narrative almost literally correct.
The basis of our banking system, then, if liable to be thus easily dissipated, is certainly wrong. Banks should be established on a foundation which neither panic nor mismanagement, neither ignorance nor fraud, could destroy. The billholder should always be secure, whatever might become of the stock-holder. That which is received as money, and which is designed to pass from hand to hand as such, should not liable to change into worthless paper in the transition.
A very important objection incident to the banking system of this country is the demoralizing effect which it exercises on society. It is a matter of the utmost notoriety that bank charters are in frequent instances obtained by practices of the most outrageous corruption. They are conceived in a wild spirit of speculation; they are brought into existence through the instrumentality of bribery and intrigue; and they exercise over the community the most unsalutary influence, encouraging men of business to transcend the proper limits of credit, and fostering a general and feverish thirst for wealth, prompting the mind to seek it by other than the legitimate means of honest, patient industry, and prudent enterprise. Let any man who has had an opportunity of observing the effect of introducing a banking institution, into a quiet country town, on the moral character of the inhabitants, answer for himself if this is not true. Let any man, whose knowledge enables him to contrast a portion of our country where banks are few, with another where they are numerous, answer if it is not true. Let any man whose memory extends so far back that he can compare the present state of society with what it was in the time of our fathers, answer if it is not true. The time was when fraud in business was as rare—we were about to say—as honesty is now. The time was when a failure was a strange and unfrequent occurrence; when a bankrupt excited the sympathy of the whole community for his misfortunes, or their censure for his rashness, or their scorn for his dishonesty. The banking system has made insolvency a matter of daily occurrence. It has changed the meaning of words, it has altered the sense of things, it has revolutionized our ethical notions. Formerly, if a man ventured far beyond his depth in business—if he borrowed vast sums of money to hazard them in doubtful enterprises—if he deluded the world by a system of false shows and pretences, and extended his credit by every art and device—formerly such a man was called rash and dishonest, but we now speak of him as enterprising and ingenious. The man whose ill-planned speculations miscarry—whose airy castle of credit is suddenly overturned, burying hundreds of industrious mechanics and labourers under its ruins—such a man would once have been execrated; he is now pitied; while our censure and contempt is transferred to those who are the victims of his fraudful schemes.
For its political effect, not less than moral, our bank system deserves to be opposed. It is essentially an aristocratic institution. It bands the wealthy together, holds out to them a common motive, animates them with a common sentiment, and inflates their vanity with notions of superior power and greatness. The bank system is maintained out of the hard earnings of the poor; and its operation is to degrade them in their political rights, as much as they are degraded in a pecuniary respect, by the accident of fortune. Its tendency is to give exclusive political, as well as exclusive money privileges to the rich. It is in direct opposition to the spirit of our constitution and the genius of the people. It is silently, but rapidly, undermining our institutions; it falsifies our grand boast of political equality; it is building up a privileged order, who, at no distant day, unless the whole system be changed, will rise in triumph on the ruins of democracy.
What then is the remedy for the evil? Do away with our bad bank system; repeal our unjust, unsalutary, undemocratic restraining law; and establish, in its stead, some law, the sole object of which shall be to provide the community with security against fraud. We hope, indeed, to see the day when banking, like any other mercantile business will be left to regulate itself; when the principles of free trade will be perceived to have as much relation to currency as to commerce; when the maxim of Let us alone will be acknowledged to be better, infinitely better, than all this political quackery of ignorant legislators, instigated by the grasping, monopolizing spirit of rapacious capitalists. This country, we hope, we trust, is destined to prove to mankind the truth of the saying, that the world is governed too much, and to prove it by her own successful experiment in throwing off the clogs and fetters with which craft and cunning have ever contrived to bind the mass of men.
But to suit the present temper of the times, it would be easy to substitute a scheme of banking which should have all the advantages of the present one, and none of its defects. Let the restraining law be repealed; let a law be substituted, requiring simply that any person entering into banking business shall be required to lodge with some officer designated in the law, real estate, or other approved security, to the full amount of the notes which he might desire to issue; and to secure, that this amount should never be exceeded, it might be provided that each particular note should be authenticated by the signature of the comptroller, or other officer entrusted with the business. Another clause might state suitable provisions for having the securities re-appraised, from time to time, so that bill holders might be sure that sufficient unalienable property was always pledged for the redemption of the paper currency founded upon that basis. Banking, established on this foundation, would be liable to none of the evils arising from panic; for each holder of a note would, in point of fact, hold a title-deed of property to the full value of its amount. It would not be liable to the revulsions which follow overtrading, and which every now and then spread such dismay and ruin through commercial communities; for when bankers are left to manage their own business, each for himself, they would watch the course of trade, and limit their discounts accordingly; because if they extended them beyond the measure of the legitimate business of the country, they would be sure that their notes would return upon them in demand for the precious metals, thus forcing them to part with their profits, in order to purchase silver and gold to answer such demand.
But much as we desire to see the wretched, insecure, and, in a political view, dangerous banking system superceded by the more honest and equal plan we have suggested, we would by no means be considered as the advocates of sudden or capricious change. All reformations of the currency—all legislation, the tendency of which is to disturb the relations of value, should be slow, well considered and gradual. In this hasty and unpremeditated article, we have glanced at the system which we desire may ere long take the place of the present one, and have rapidly adverted to some of the reasons which render the change desirable. But as a first step towards the consummation, we should wish the legislature to do nothing more at present than restrain the issue of notes under five dollars, and refuse to charter any more banks. The people demand it, and we do not think that the public sentiment is in favour of any further immediate reformation. As to the prospective legislation which is proposed by some, we think it anti-republican and unwise. We would not take advantage of any present movement of the public mind to fasten a law upon the state, which public sentiment may not afterwards sustain. The same influence of public opinion which, is now about to lead to the long-desired first step in Bank reform, will be potent in carrying on the reformation to the desired conclusion. A good maxim, and one which it will be well to be governed by in this matter, is festina lente.*24
Notes for this chapter
A reference to William M. Gouge, A Short History of Paper Money and Banking in the United States (Philadelphia: T. W. Ustick, 1833).—Ed.
STRICTURES ON THE LATE MESSAGE
End of Notes
UNCURRENT BANK NOTES
Evening Post, March 10, 1835. Title added by Sedgwick.
We wish some public spirited man who has access to data that would afford a reasonable basis for a conjectural calculation, would furnish us with an estimate of the immense amount of money which is annually lost in this city, by the labouring classes, in the discount upon uncurrent bank notes in circulation. Do the mechanics and the labourers know, that every dollar which is paid in the discounting of uncurrent notes in Wall-street, is filched out of their pockets? That such is the fact is susceptible of the clearest demonstration.
In the first place, the circulation of uncurrent bank notes is chiefly kept up by a direct and infamous fraud upon the working classes. It is a common practise with employers when they pay off their hands on Saturday, to go into Wall-street and purchase of some broker for the purpose, a lot of notes of depreciated value, varying from half to one and a half per cent. below par. These notes they palm off upon their workmen as money. If a master mechanic has a thousand dollars a week to pay to his hands, it is clear that he pockets every week by this operation some ten or fifteen dollars; and it can be shown with equal clearness that those in his employment are defrauded out of this sum. If a man hesitates to take this depreciated paper, he is told that it passes as currently as silver in payment of any thing he may wish to purchase; and so, in truth, it does. Yet he could not exchange it for silver, without paying the broker a discount, and let him not imagine, though he may seem to pass it away to his grocer or his baker at par, that he does not lose this discount all the same. Nay, the mechanic and labouring man whose employers are conscientious enough to pay them their wages in real money, bear their full proportion of the loss on the uncurrent notes in circulation, equally with those to whom the depreciated paper is paid. The entire sum paid for the discount of depreciated bank paper falls on the mechanics and labourers, and is wrung out of their sweat and toil. Nay more: they not only lose the amount which is actually paid for discount to the money changers, but they also pay a per centage on that amount equal to the average rate of profit which merchants charge on their goods. We can make this plain to the dullest apprehension.
The labouring man, when he returns home of a Saturday evening, with his week's wages in his pocket, in this depreciated paper, stops at his grocer's, and pays him the amount of his weekly bill. The grocer in the course of a few days pays this money away into the hands of the wholesale merchant from whom he purchases his commodities. The merchant, when a certain amount of this kind of paper has accumulated on his hands, sends it into Wall-street, and sells it to the brokers, and when his clerk returns, an entry is made in his books of the amount paid for discount. The sum total paid in the course of a year for the discount of depreciated paper forms an item of expense which is calculated as one of the elements in the cost of his goods. To pay for his goods he is obliged to buy bills of exchange, or in other words, to remit specie to Europe. Whatever this specie costs him, his goods cost him; and he therefore looks upon the amount he had to pay to turn the uncurrent paper received from his customers into specie as a constituent part of the first cost of his merchandize. Upon the whole sum of the cost, thus ascertained, he puts a certain per centage profit, and fixes his prices accordingly. The retail trader then buying a lot of goods of him, pays him not only a proportional part of the discount which the wholesale merchant actually paid on his uncurrent paper, but a profit thereon. This, however, makes no difference to him, for he has only to put his own profit on above all, and let the loss fall on the labourer, when he comes for his tea and sugar and other little necessaries and comforts for his family. That this is a true, though homely exposition of the case, any body must see who will only give himself the trouble to think about it.
The whole amount of uncurrent notes which pass through the broker's hands annually may be stated at a given sum, and the discount thereupon amounts, on an average to a given per-centage. This sum, whatever it is, (and it must be immense) is a tax on the business of the community, which each individual shuffles off his own shoulders on those of the persons next beneath him, and so it descends by gradation till it reaches the broad backs and hard hands of the mechanics and labourers, who produce all the wealth and bear all the burdens of society.
But the mechanics and labourers have it in their power to rid themselves of this imposition. The task is very easy: it is only to learn the efficacy of the word COMBINATION. There is a magic in that word, when rightly understood and employed, which will force the scrip nobility to do them justice, and yield them, without drawback and without cheatery, the full fruits of their toil. Let them inquire by what means it is that this immense amount of depreciated paper is kept in circulation. They will find it is chiefly through the instrumentality of master-workmen and others having mechanics and labourers in their employment. They will find that this wretched substitute for money is bought, for the express purpose of palming it off upon them as real value, while their task-masters and the brokers share the spoils between them. A mechanic dare not refuse to take the wretched trash; because, if he does, he will be turned away to starve. But what a single mechanic may not be able to compass alone, could be easily effected by combination. Will the mechanics and labourers wait for eighteen months, in the hope that the juggling law now before the legislature will by that time go into operation, and rid them of the paper money curse? Let them not rest in any such belief. Let them know their own strength and resolve to be imposed on no longer. Why are the producers of all the wealth of society the poorest, most despised and most down-trodden class of men? Because they submit to be the dupes of the scrip nobility—because they are ignorant of their own strength. Let them combine together to demand whatever the plain principles of justice warrant, and we shall see what power there is which can deny them.
Evening Post, September 14, 1836. Title added by Sedgwick. Text abridged.
The vast and sudden increase which the paper money circulation of this country has undergone within the last eighteen months is the cause of the feverish thirst of riches which the community now exhibits; and whatever shall check that circulation, and turn it back upon the banks, will arrest the disease, but arrest it with a violence that to many will prove fatal, and give a fearful shock to all. Paper money is, to the people of this country, the insane root that takes the reason prisoner; and they can be restored to sanity only by withholding such stimulating and dangerous aliment. As it now is, their appetite grows by what it feeds on. The demand for money increases with each succeeding day; and every new loan of bank credit but gives rise to new projects of speculation, each wilder and more chimerical than the last.
The effect of this pervading spirit of speculation (or spirit of gambling, as it might with more propriety be called, for it is gambling, and gambling of the most desperate kind) on the morals of the community is dreadful. Its direct and manifest tendency is to blunt men's moral perceptions, and accustom them by degrees to arts and devices of traffic which an honest, unsophisticated mind would shrink from with horror as frauds of the most flagitious dye. It creates a distaste for the ordinary pursuits of industry; it disinclines the mind from gradual accumulation in some regular vocation, and kindles an intense desire, like that expressed in the prayer of Ortogal of Basra, "Let me grow suddenly rich!" To this gambling spirit of the age we may directly trace the most of those prodigious frauds the discovery of which has recently startled the public mind. "Startled the public mind," did we say? The phrase is wrong. The public were not startled. They heard the stories with the most stoical indifference; and if any exclamations were uttered, they conveyed rather a sentiment of commiseration for the criminals, than one of detestation for their stupendous crimes.
But the day of the madness of speculation is drawing to a close. The time must come, nor can it be remote, when some financial or commercial revulsion will throw back the stream of paper circulation to its source, and many a goodly vessel, which had ventured too boldly on the current, will be left by the reflux stranded on its shores. Circumstances may yet defer the evil day for awhile, but it cannot be far off. A failure of the cotton crop, a slight reduction of prices in Europe, or any one of the thousand contingencies to which trade is perpetually liable, will give a shock to the widely expanded currency of the country, which will be felt with ruinous force through every vein and artery of business. Wo unto them in that day who do not now take timely caution. Their cities and towns and villages, which they are now so fertile in planning, as if they thought men might be multiplied as rapidly as paper money, will remain untenanted and desolate memorials of their madness, and the voice of sorrow and mourning, instead of the din of present unreal prosperity, will be heard through the land.
CAUSES OF FINANCIAL DISTRESS
Evening Post, October 24, 1836. Title added by Sedgwick. Text abridged.
The financial storm long since predicted by this journal has at last commenced in good earnest, and begins now to be severely felt. For a considerable time past a pressure for money has been experienced in this metropolis, and within a few days it has increased to a degree which has made it the subject of general conversation and complaint. Men now perceive that their projects, sustained on the airy basis of too widely extended credit, are in danger of sudden ruin. A sense of general insecurity is awakened, and alarm and consternation are taking the place of that fool-hardy spirit of speculation, which, but a little while ago, kept hurrying on from one mad scheme to another, as if it possessed the fabled art of turning all it touched into gold. A commercial revulsion has commenced, and we fear will not terminate, till it has swept like a tornado over the land, and marked its progress by the wrecks scattered in its path.
It is always to be expected in this country, when any thing occurs to create extensive dissatisfaction, that newspaper writers, on one side or the other, will strive to turn it to the uses of party; and we accordingly find, in the present instance, that the opposition journals seize the subject of the financial difficulties as a theme for declamation against the government, and ascribe all our pecuniary embarrassments to the mal-administration of public affairs. Some, with singular contempt for the understanding of their readers, deal in mere generalities, and, in all the worn out common places of the political slang vocabulary, denounce the administration as composed of a set of ignorant "tinkers of the currency," or fraudulent speculators, who interfere with the financial arrangements of the country, for the purposes of private gain, perfectly regardless of the wide-spread ruin they may occasion. In the same spirit they call upon the merchants to close their stores and counting-rooms, and go out into the streets as political missionaries, devoting themselves exclusively, for the next twenty days, to the business of electioneering, with a view of putting down a corrupt administration, which is forever trying high-handed experiments with the currency, and obstructing the sources of commercial prosperity. The day has been when the mercantile men of this community suffered themselves to be inflamed by such appeals, and acted in pursuance of such advice. But we trust that day is past, never to return.
Another portion of the opposition papers, with more respect for the intelligence of their readers, endeavour to fortify their charges against the administration by explaining the mode in which they conceive it to be the author of the present difficulties. By some of these, all the embarrassments of the money market are traced to the order of the Treasury Department, requiring payment for public lands to be made in specie. This may do very well as a reason to be urged by those wise journalists who are ever ready to shape their political economy to the exigencies of party; but will hardly satisfy readers of so much intelligence as to demand that the cause shall be adequate to the effect. Any one who will give the slightest attention to the statistics of the land sales, and who will reflect what a vast amount of purchase an inconsiderable sum in specie will pay, in its necessarily constant and rapid circulation from the land office to the neighbouring bank, and from the bank back to the land office, must be perfectly satisfied that the regulation in question cannot have had any perceptible effect in producing the general financial pressure now experienced.
There is a third class of opposition writers who, like the others, imputing all the difficulties to the administration, yet find out an entirely different and much more adequate cause. These impute it entirely to the Treasury orders, issued to various banks in different parts of the Union against the public funds collected on deposite in the banks of this city. By the natural course of trade, New-York is the great money market and storehouse of bullion for the entire confederacy. At this port, four-fifths of the whole revenue of the country are collected, and would here accumulate, affording a substantial basis of credit and reciprocal accommodation to those who pay it, were it not for that "tinkering with the currency" which subverts the natural order of things. To this extent we sincerely go with those who are declaiming against the government. We agree with them that the condition of affairs, as established by the laws of trade, is deranged by government interference, and that the treasury orders, which have the effect to cause a sudden dispersion of the public funds accumulated in this city, and to drain the specie from the vaults of our banks, sending it hither and thither, and for a time, entirely destroying its use, as a foundation of commercial credit, are the immediate cause of the prevailing distress....
But the first, great, and all important cause of the pecuniary distress lies much deeper than any which the opposition papers assign. It is neither the Treasury order in relation to the public lands, nor the Treasury orders on deposite banks. These last have, at the very worst, but precipitated an evil, which, had no such orders been issued, or no transfers in any way made, could by no possibility have been long averted. It would have come next winter, and with a pressure greatly augmented by the delay. It would have fallen, like an avalanche, at the very season when revulsion is more fatal, because then the largest amounts of payments are to be made. The distribution law takes effect in January, and had not the necessity of complying with the conditions of the supplementary bill given the present harsh, but salutary check to speculation, the amount of credit, now so prodigiously inflated, would have been still further extended, and the shock of a sudden explosion would have been far more fearful and disastrous.
Without the distribution bill, even, a dreadful commercial revulsion could not long have been avoided. We were rushing on madly at a rate which could not long be continued. The first obstacle must have thrown us from our course, and dashed us to pieces. Look at the present state of the country. When did it ever before present such a spectacle of prodigiously distended credit? When did such a fever of speculation madden the brains of whole communities? When did all sorts of commodities bear such enormous prices? And when, at the same time, was there ever such vast consumption—such prodigality, wastefulness, and unthinking profusion? Is the treasury order the cause of this? Alas, it is one of its remote consequences. What filled your treasury to such overflowing, that some cunning politician was prompted by a consideration of the exuberance to devise the scheme of distribution? Speculation. What excited that spirit of speculation? The sudden and enormous increase of bank capital, and the corresponding inflation of bank currency. In the last eighteen months alone nearly one hundred millions of bank capital have been added to the previous amount. Examine the following bank statistics, derived from sources believed to be accurate, and see how prodigiously and rapidly our system of bank credit has been swollen:
Who can look at this statement, and not feel convinced that the cause of the present financial distress lies deeper than treasury orders, whether in relation to public lands or public deposites? This enormous increase of bank capital in the last six years has been accompanied by a corresponding expansion of bank issues, and by a commensurate extension of private credits. The business of the country has been stimulated into most unwholesome and fatal activity. Circumstances, unlooked for, have occurred to aggravate the epidemic frenzy. The government has obtained the payment of long delayed indemnities from foreign powers; and new formed corporations have contracted large loans abroad. These sums, added to the product of our staples, have been exhausted by the excessive importations. Domestic speculation—speculation in the products of home consumption, in land, in town lots, in houses, in stock enterprises, in every thing, has kept pace, step for step, with the inordinate increase of foreign trade. What is to pay all this vast accumulation of debt? It must come at last out of labour. It must come from the products of industry. We have been borrowing largely of the future, and have at last arrived at the point where we must pause, and wait for the farmer, the mechanic, and patient hewer of wood and drawer of water to relieve us from our difficulties.
Reader, take home to your bosom this truth, and ponder well upon it, it is the bank system of this country, our wretched, unequal, undemocratic system of special privileges, which occasions the difficulty we now begin to feel. It is not pretended that under the free trade system of credit, or under any system, commercial revulsions would not sometimes, and to some extent, take place. They are incident to the nature of man. Prosperity begets confidence; confidence leads to rashness; the example of one is imitated by another; and the delusion spreads until it is suddenly dissipated by some of those rude collisions, which are the unavoidable penalties of a violation of the laws of trade. But such fearful and fatal revulsions as mark the eras of the commercial history of this country, would not, could not, take place under a free trade system of banking.
It is when ignorant legislators pretend to define by law the limits of credit and shaking at one time with unnecessary trepidation refuse to enlarge them to the wants of trade, while at another they extend them far beyond all reasonable scope—it is when such "tamperers with the currency" attempt to control what is in its nature uncontrollable, and should be free as air, that revulsion, panic, and commercial prostration necessarily ensue. While we have restraining laws and specially chartered banks, we shall have periodical distress in the money market, more or less severe, as the period has been hastened or delayed by accidental causes. Party writers may at one time lay every disorder to the removal of the deposites, and at another to a treasury order; but whatever orders the Treasury may issue, the alternate inflations and contractions of the paper currency incident to such a pernicious system as ours will continue to produce their inevitable consequence, unwholesome activity of business, followed by prostration, sudden and disastrous.