The History of Banks Book

The History of Banks Book
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    UBRARYOF6HIsr0RYTHE HISTORY OF BANKS

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    [ RICHARD HILDRETH]THE HISTORY OF BANKSTO WHICH IS ADDEDA DEMONSTRATION OF THEADVANTAG~S AND NECESSITYOFFREE COMPETITIONIN THE BUSINESS OF BANKING[ 1837 ]WITHA LETTERTO HIS EXCELLENCY MARCUS MORTONON BANKING AND THE CURRENCY[ 1840 ]REPRINTS OF ECONOMIC CLASSICSAUGUSTUSM. KELLEY•PUBLISHERSNEW rO...

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    First Edition, 1887(Boston: Hilliard, Gray &Company, 1887)Reprinted 1968, 1971 byAUGUSTUS M. KELLEY · PUBLISHERSREPRINTS OF ECONOMIC CLASSICSNew YorkNew York10001I S B N0 678003 "16 9LON79160430PRINTED IN THE UNITED STATES OF AMERICAby SENTRY PRESS, NEW YORK, N. Y. 10019

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    THEHISTORY OF BANKS:TO WHICH IS ADDED,ADE~IONSTRATION OFTHEA D VA·~ TAG E S AND N EC E SSIT YOFFREE COMPETITIONIN THEBUSINESS OF BANKING.BOSTON:HILLIARD, GRAY &;COMPANY.1837.

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    Entered according to Act of Congl;ess, in the year 1837, by' JOHNH. EASTBURN,inthe Clerk's Office of the District Court of Massa-chusetts.

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    CONTENTS.PART FIRST.HISTORY OFBANKS.Chap. I.Banks of Venice, Genoa, and Barcelona.Chap. II.Banl{s of Amsterdam, and Hamburg.Chap. III.Bank of England.Chap. IV.Private Banks.Chap. V.Scotch Banks.Chap. VI.Law's System of Banking.Land Banks.Chap. VII.Mississippi System.Chap. VIII.Continuation of the...

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    ivCONTENTS.PART SECOND.A DEMONSTRATION OF THE ADVANTAGES AND NECES-SITY OF FREE COMPETITION IN THE BUSINESS OFBANKING.Introdaction.Chap.I. The received Theory ofBanking.Chap. D.A new Theory of Bankins.Chap. ID.Of a NationalB~n~.

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    HISTORY OFB.~NKS.CHAPTER I.Banks of Venice, Genoa and Barcelona.THEfirstregular institutionresemblingwhat we callaBank, was establishedat VENICE,nearly seven hundred years ago.,In itsorigin ithad nothing to do with thebusiness of banking.It beganin this\vay.The Republic being engaged in war,andfa...

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    6HISTORY OF BANKS.the corporation were undoubted, and its char..acter highly respectable, it was soon discoveredthat its name upon a bill, gave it tldditionalvalue.The Chamber generally had some fundsonhand.It was found an advantageous invest-~ent to employ those fundsin the business ofbuying and...

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    HISTORY OF BANKS.7transactions were required to be made there, andin the manner just described.This Inethodofeffecting payments was plainly a rude approachtowards theinvention of bank notes; the CIR-CULATIONof which, constitutes the third andlast branch of the business of a modern bank.That part ...

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    8HISTORYor BANKS.easier pay their debts in.a depreciated currency ;and as violent fluctuations in prices and in traaehave been thus produced as were ever caused bythe depreciation of paper currencies.The Eng-lish pound and the French livre were originallya pound troy of silver; but the former has...

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    HISTORY OF BANKS.9such coin as would be received; or if the biUswere made payable in currency, their value ,vasin consequence fluctuating and uncertain.To remedy these evils, the authorities at Am-sterdam resolved to have recourse to that sys-tem of ballk payments, which had so long beenin use at...

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    10HISTORY OFBANKS.of bank money.It received coin and bullionupon deposit on the following terms. When thecoin or bullion was deposited, a certain sum ofbank money was transferred to the account ofthe depositor, equivalent to the current value ofthe coin or the mint price of the bullion, witha sma...

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    HISTORY OF BANKS.11Banks on the same principle with the Bankof Amsterdam were afterwards established atHamburg, and some other of the comlnercialtowns and free cities of Germany.CHAPTER III.Bank of England.THEBANK OF ENGLAND,first chartered in1694, is the prototype and grand exemplar of allour mo...

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    12HISTORY OF BANKS.the government, how wasit to do any busi..ness at all?This state of things led to theinvention of bank-notes.Instead of givingcoin for the bills which it discounted, the Bankgave its own notes, which, as they were madepayable at the Bank on demand, were receivedby the merchants...

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    HISTORY OF BANKS.13illterest at all, that is, by gifts to the govern-ment."fhe last increase in thecapital of the Banktook placeat the renewing of the charter, in1781.It lvas then raised to 11,642,4001.,orabout fifty-six millions of dollars, at whichamount it has ever since remained.The \vho...

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    J4HISTORY OF BANKS.CHAPTER IV.Private Banks.'VITH the increase of wealth and commerce inEurope, private bankers established themselvesin all the principal cities and towns.They re-ceived Inaney on deposit; they managed themoney affairs of states and individuals; theylent money to such borrowers a...

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    HISTORY OF BANKS.15still the private banks continued to increase, andmore and more to dispute the circulation withthe BanI\. of England.CHAPTER V.Scotch Banks.Two banks were established in Scotland bycharterfrom the king; one theBank of Scot-lancl,in 1695; theother, theRoyal BanlcofScotland,in 17...

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    16HISTORY OF BANKS.at such times and to such amounts as helnaythink proper; interest begins only from the pay-ment of his drafts; and he is at liberty to paymoney into the bank, according to his own con-venience, which payments cancel so much of hisdebtto the bank,.·~nd stop theinterest uponit.T...

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    HISTORY OF BANKS.17mercantile theory of political economy,at thattime universally prevalent, coin is the onlysub..st~ntjal, actual wealth; and as, according to thattheory, the greatol!ject of the trade of a coun-try, is, or ought to be, to increase the quantityof coin,-bank-notes caIne to be look...

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    18HISTORYOF BANKS.and notes composing that currency, willdimin-ish in ajust proportion, sothat alt.ogethertheymay make up exactly the same sum totalasbefore.Ignorant of this fact, and flattering themselvesw~th the idea thatthey could increase capital atpleasure, the British banks, and theBank ofE...

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    HISTORY OF BANKS.19increase of their circulation, ,vas sure to involvethemin troubleand expense.Of course theyfound it necessary to put a lirnit to their loans,and not to go beyonda certain amount.But this necessaryprudence~ or as it was de-scribed, this short-sighted folly and injuriousandillibe...

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    20HISTORY OF BANKS.to Scotsmen, orfor some other reason, it\vas.not approved.I-Ioweverit, made many con-verts; and according to the notions then cur-rent, it was impossible to detect its theoreticfallacy.Several private banks were establishedmore or less, upon this principle, but they allended in...

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    HISTORY OF BANKS.21had bought out the Bank of Law and company,and that hencefor\vard it "Tould be known as theRoyal Bank.l\tlr. Law was appointed directorgeneral, and branches were establishedin thechief provincial to,vns.To carry out l\Jlr. La,v's principles, and tocreate a borro\ver \vhich...

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    22HISTORY OF BANKS.besides engrossing all the most lucrative busi-ness of the country, the Compariy now becamethesole publiccreditor.To raise the immense sums necessaryforthese vast undertakings, new stock wasocca-sionally created.The original shares inthecompany, ,,,ere 500' livres each; but the...

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    HISTORY OF BANKS.agai~st its consequences, successive edicts\veteissued in January, }-'ebruary and March, 1720,making the notes a legal tender in payment ofrents, customs and taxes; restricting paymentsin specie to small sums; and 'prohibiting anyin-dividual or company to have in possession at an...

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    HISTORY OF BANKS.no,v stood at half the real value of \vhatit hadbeen,at th.e establishment ofthe bank.I t was represented to the regent, by some ofhis advisers, that this discrepancy bet\veen thelivre of coin and the livre of paper, ought notto be tolerated; and that it was necessary toraise the...

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    HISTORY OF BANKS.avoid its effects, and to escape parting with thecoin it had accumulated, the bank was closed.I tis easy to imagine theconsequen~es ofthese procedures.All business caIne to a sud-den stand. Thousands who had imagined them-selves rich, sunk at once into poverty and dis-tress; and ...

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    26HISTORY OF BANKS.theywould havebeenfar more fatalto theFrench nation.CHAPTER VID.Continuation of the History of the Bank of England.-Stoppage and.Resumption of Specie Payments.THEconnection between the Bank of Eng-land andthe British government had long beenextremely intimate.The Bank Directors...

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    HISTORY OF BANKS.27ministers were suspected, and not without rea-son, of fomenting this alarm, for the sakeofstrengthening their -popularity, and keeping upthe national phrensy against the French repub-licans, which was now beginning to flag.But this alarm produ-ced an effect which theministers h...

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    28HISTORY OF BANKS.The. first announcement of this news produc-ed a great sensation.But the Directors wereplaying a sure game.The government was ontheir side.The merchants knew not howtodispense with the accomodations afforded by theBank; and to secure their continuance, it wasnecessary to suppor...

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    HISTORY OF BANKS.29with the admirableworkin~of theirnon-specie-payin,g-bank; and the opInion gradually creptin among them, thatbank~notes were the samething as coin; and~hat it was in the power ofthe Bank to manufacture money at pleasure; atruly comforting idea for people engaged in. soexpensive ...

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    HI-STORY OF BANKS.terial newspapers, denounced 8Stheorists, jaco-bins,traitorsto their country, and favor-ers of the French; and when some persons be-gan to talk of refusing to accept the bank paperin paymentof rent and otherdebts, anact ofParliament was passedmaking the notes a legaltender.Encou...

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    HISTORY OF BANKS.31monopoly of navigation,-cut off a lucrativebranch of trade.Business was impeded; fail-ures began; and it soon became evident thatmuch of the supposed acquisitions of the lastten years, were altogether illusory, consistingonly in figures.When the property was soughtfor, it ,vas ...

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    82HISTORY OF BANKSestablished, and some of the reasoning was.veryquestionable.This gave the assailants an ad-vantage which they did not fail to improve. Butso great is the force of truth, that if once it canbe fairly presented to the public mind,it is al-most certain to prevail; and, notwithstand...

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    HISTORY OF BA.NKS..58by such a sudden revolution ,inthe commercialrelations ofthe country, as produced a severemercantile crisis, and .very numerous failures.Inthis condition ofthings, the nation, the minis-try,and the Inerchantshad notthe· couragetorosolve upon an instant resumption ·of9pecie ...

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    BISTOIl.Y OF -SANKS.depreciating currency is a constant rise in prices,and a temporary stimulus to trade..The effectof a gradually appreciating currency is exactlythe opposite.It produces a fall 'in prices; andthis constant fall in prices bas a most depress-ing and discouraging effect upon all ki...

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    BISTOI\Y 01' BANKS.was acknowledged by the British government.This acknowledgement was attended withanincreased intercourse. with those states; loanswere opened in· London on their behalf; com..panies were established with large capitals, towork the American mines; and the most mag·nificientrep...

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    86HISTORY OF BANKS.losing, till) at length, their capital was exhaust-ed.They had been insolvent for· some time;andthe panic of 1825, was not the. cause, it wasonly the occasion, of their failure.The practical men, if· two things happen atthe same time, however .little connection theremay be be...

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    HlSTORY OF BANKS.87and substantial·prosperity, such ·as had hithertobeen unknown to the nation since thecommence-ment of Pitt's anti-jacobin war.CHAPTER IX.Continuation or the Historyof EnglishPrivate. Banks.lome-Stock Banks.DURINGall thislong period, the Englishpri..vate banks ,,,,ere constant...

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    S8·HISTORY OF·BANKS~But the private banks recovered, with there·rival of business and industry, and soon regainedtheir former credit and circulation.The char-ter of the Bank of England expired in 1835;and though it has been provisionally extendedfor twenty-one years, the Bank is shorn of apart...

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    HISTORY OF BANKS ..39there are strong indications, that relying upontheir Dleans, their credit, and their popularity,they Inean to dispute with the Bank, andthatsliortly, the arbitrary and exclusivecontrol,which has so long been exercised by itsDirec~tors, over the monetary affairs ofGreat Britai...

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    HISTORY OF BANKS.nience, are even preferred to coin.This stateof things continues so long as the issues of pa-per do not exceed the amount of· the currencypreviously circulating in the country.But sosoon as that limit is passed, and it soon is pass..ed, a rapid depreciation instantly commences;a...

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    HISTORY OF BAN-XS.4,1 .States, declared··their notes to be a legal tende.rfor all paYIJlents, and perfectly equivalent to coin.It was in vain that the States enacted the mosttyrannical laws for the regulation of prices, anddenounced one price in paper and· another incoin, as wicked, traitorous...

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    HISTORY OF BANKS.CHAPTER XI.Colonial Currencies of PaperMoney in America.BUTthe experience of AInerica in the matterof paper money was earlier than the revolution.In consequence of the accession of Williamof Orange to the English throne, the Anglo-American colonies became involved in a seriesofex...

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    HIS.TORY OF BANKS.--and in spite of the witcheS', who about thistime were let loose upon the colony, and com-menced·their operations in Boston··and Salem,-the General Court of Massachusetts fitted outan armamentof t\'Telve hundred men, whicksailed under the command of Phipps, to attackQuebec.B...

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    HISTORY OF BANKS.whIch was adopted in several of the colonies,was this.The government issueda certainamount of hills of credit.These billswerelent out to the principal persons in the colony,the}" giving mortgages upon theirlands, or othersecurity, 10r the punctual repaymentof thesums lent, i...

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    HISTORY OF BANK,S.issued by the colonial governments, not only1J1way of loan, but as a means of paying theirwar expenses, the depreciation, attimes, be-came excessive.It showed itself, as a depreciation always does,by a rise in prices.'I'his rise was explained bythe friends ofthe paper currency, ...

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    HIS'TORY OF B'ANKS.Thisrestraint upon thepower of the colo--nial governments to issue hills of credit, gavebirthto severalatt.empts to get up privatebankson the principleof Mr Law; andas these at-tempts were partiallysuccessful,.newis~ues ofa depreciating paper continually took place.A minutehist...

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    HISTORY OFBANKS.4,7had become more intelligent; ,the principles ofpolitical economy \vere beginning to be under-stood; the experiDlent ,vas tried upon a grandscale, and its effects were obvious.It impov-erished· honest and pat.riotic men; and transfer-red their wealth into the hands of rogues an...

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    48HISTORY OF BANKS.but the paper money which Congress and theStates had issued so profusely at its commence-ment, had depreciated to no.thing, and droppedout of circulation.Coin wasnow the only~urrency ; and Congress met ,vith thegr(~atestdifficultyin finding pecuniary means to carryonthe war.The...

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    HISTORY OF BANKS.Congress to grant a eharter was extremelydoubtful.The services which it rendered toCongress were perspicuous and acknowledged ;in this respect it fulfilledall that hadbeen prom-ised for it.But after the war was finished, the success'ofthis institution, its· exclusive privileges,...

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    50HISTORY OF BANKS.pIe, that guided their opinions;-a striking in....stance of what the history of Pennsylvania ·atthis moment will serve to verify, that so long asbank charters are dependant upon legislativefavor, so long they will be an. everlasting boneof contention, and the fruitful source o...

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    HISTORY OF BANKS.61well .acquainted with the important aid whichhis friend Morris had derivedt.while acting asSuperintendent of Finance, from ·the BankofNorth America." Congress at-its first session,und~r the federalconstitution, was occupied \vith providing a pub-lic revenue, and funding·...

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    52HISTORY OF BANKS.on the following grounds.First,-that bank.inginstitutions in general, and thi$ Bank among therest, were the artful contrivances of cunningmen, to grow rich at the expense of the people.Secofld,-that the Bank would tend to strength-en the executive branch of the government, al-r...

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    HISTORY OF BANKS.55I will only observe that the letter of the consti-tution is on one side; while there is arrayedupon the other,the practice ofaU politicalpar~ties, the acts ofevery administration, the doingsof every Congress, the solemn decisions of theSupreme Court, and the: opinions of every ...

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    HISTORY OF BANKS.as the proudest feather in the cap of our NationalBanks.The establishment and success of the FirstBank of the United States gave a ne,,, im-pulse to thebusiness of banking.That sameyear, theMaryland Bank went into operationat Baltimore, ,,,ith a capital of$300,000/; andthe nextye...

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    HISTORY OF BANKS.56tion.The winding up of one Bank, and theputting another at \vork, however agreeable andadvantageous such an operation may be, to stock-brokersand stock-gamblers, is advantageous tothem alone.Tothe~ public it is highly incon-venient.And this is a fresh proof of the dis-advantage...

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    56HISTORY OF BANKS.the currency, ,vhich took place subsequentlytothe "rinding up of the First Bank of the UnitedStates, to the non-existence of a national bank.These thingsfollo~()ed the winding up 'of theBank, therefore theywere produced by it.Thisis a remarkably easy and convenient method ...

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    HISTORY OF BAN-KS.67the three years, 1810, 1811,1812,forty-one newstate banks \vere chartered,with an ;}ggregatecapital of somethirty-six millions.; so that aboutthe commencement of the war ,vith Great Brit-ain, the total number of banks in the UnitedStates was up\vards ofone hundred and twenty,a...

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    58HISTORY OF· BANKS.individuals, who lent to the government. Thingswent on in this ,yay till the middle of 1814. Thegovernment was then in the greatest distress formoney, and more clamorous than ever, for loans.But the banks had already gone to the utmostlimit of their means; their capitals were...

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    HISTORY OF BANKS.59for if the banks did not supply them with moneywhere were they to get it ?Accordingly the government gave a tacit con-sent; and by a compac.t among the bank direc-tors, the suspension of specie payments tookplace simultaneously, or nearly so, throughoutthe middle, southern and ...

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    60HISTORY OF BANKS.embarrassment.The treasury overflowed with"unconvertible" bank paper; but they experi-enced the greatest difficulty inmeeting theheavy demands which fell due in the easternstates, ""There nothing would be accepted inpay"!ent, except specie or notes equi...

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    HISTOB.Y OF BANKS.61there.In fact,that part of the countrywas:subject to a particular depression.For the for-eign trade left Boston and the other New Eng-.land ports, wh.ere the duties were demanded inspecie or notes equivalent to specie, and concen-·trated at Baltimore and other southern cities...

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    62HISTORY OF BANKS.new Bank was thirty-five minions, and its char-ter conformed in all important particulars, tothat of its predecessor.The reasons alleged for the establishment ofthis Bank were principally two.First, that ex-perience had proved the necessity of such aninstitution for the conveni...

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    HISTORY OF BANKS.6Sthat resolution alone, which compelled there-sumption of specie payments.Yet it cannot be denied that the governmentgained several considerable advantages fromtheestablishment of the Bank.First, there was the bonus, which at that mo-ment was avery convenient aid to the treasury...

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    HISTORY OF BAN,KS.CHAPTER XVI.Panic of 1818-19.THEsubscribers to the new National Bank,notwithstanding it was to be a specie-payingbank from the beginning, flattered themselveswith the idle hope that the dividends \vouldequal or surpass those lately made throughoutthe country, by non-specie payin...

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    HISTORY OF BANKS.Bank of the United States granted loans to allwho appliedIIBefore the end of the year, theloans ofthe Bank, those togovernment included,amounted to upwards of sixty-three millions,and its circulation was about thirty millions.The stock rose to fifty per cent advance.As to those b...

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    66HISTORY OF BANKS.Debts contracted in a depreciated currencyremained at the same nominal amount, afterthe currency was restored to par; that is, theywere relatively increased in the same proportion.But the property with whichthose debts ,vereto be paid,and llpon the strength of ,vhich theyhad be...

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    HISTORY OF BANKS.67that the Bank might fail.Ho\vever, by sellingtheir government stocks in Europe, and import-ing specieat a great loss, theywere enabledtoweather t;he storm; and after the month ofMay, the Bank was considered out of danger.But the Bank ,was. saved, as always happensin such cases,...

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    68HISTORY OF BANKS.had taken no part in the dance, so it was notobliged to pay the fiddler.Business was de-pressed there, because the general peacehadput an end to the carrying trade; because themanufacturers no longer enjoyed the monopoly,which the embargo, the non-intercourse, thewar and thedou...

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    HISTORY OF BANKS.69elared those laws to be unconstitutional, the boldbankrupts, by \vhom they had been enacted,re-solved to overturn the Court, andto substitutea more pliant tribunal in its place. . According-ly, they passed anact ousting the oldCourt, andestablishinga newCou_rt ofAppeals.Buttheo...

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    70I-IISTORY OF BANKS.ceased with the disbanding of the army in 181 7;and the influx of foreign goods, which the dis-tresses of the English manufacturers, obligedthem to sell at any price they could get, was TU-inous to domestic manufactures.The loss ofthe carrying trade has been already mentioned...

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    HISTORY OF BANKS.71tion, and the crash w'hich took place in Eng-land, extended to this country, and involvedavery large number of the houses engaged inforeign trade.Meanwhile the protective tariff was enacted,principally through the efforts and influence of a"theorist" from Kentucky.The...

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    72HISTORY OF BANKS.slightest interruption to their business.Almostevery body was connected in some/way, with themanufacturers; and -aItTIost every body felt theeffects of the shock. The alarm" distress, and pe-cuniary embarrassment were greater throughoutNew England than at any time since th...

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    HISTORY OF BANICS.75some method of increasing the circulation; andthe Directors applied to Congress for a modifi-cation of the charter, by which the Bank mightbe excused from redeeming its notes except atPhiladelphia.If this applicationhadbeengranted, it would doubtless have had the desiredeffect...

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    74HISTORYOF BANKS.ofmeeting thedrafts of the government atdrfferent points of the country, first led theBank into this business; and as its facilities fortransacting it were great, so, for a long time,itenjoyed a complete monopoly of it.rrhe Bankeffected these exchanges at very reasonablerates, a...

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    HISTORY OF BANKS.75tal employed in it, has by no means kept pacewith its o\vn extension.Hence the great risein the prices of exchange.But this matter"viIIbemore fully explained in a subsequent chapter.It was fortunate for the Bank of the UnitedStates, that the disastrous experience of thewes...

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    76HISTORY OF BANKS.banking privileges has always been least com-plete, and where, the banks have al,vays beenbest managed, they went on, steadily increasingas they al\vays have dene since their first intro-duction ; and that too in spite of the most stren-uous and bitter opposition on the part of...

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    HISTORY OF BANKS.77tress; and they have been sighing over the ruinof the country, at the very moment of its high-estprosperity.They have always been accus-tomed toIQw prices; they look upon lo"\v pricesasnatural; the present rise is certainlyunnat-ural";it must be produced by'~speculati...

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    78HI9TORYOF BANKS.is in fact lower thanever,-..but those who wishto borro·w have to pay a very heavy prenlium ofinsurance against t.he risk of their own insol-vency.It is not easy to find a lender, and it isnecessary to tempt him with the offer. of a highprice.Apressu.reof this sort pervaded the...

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    HISTORY OF BANKS.CHAPTER XVIII.The controversy touching the r.e-charter of the SecondBankof theUnited States.Panic of 1833-"34.BUTin the rapid careet of prosperity whichthe c.ountry has been running for the last sixyea-rs., there was asudden stop, andsomethinglike a movebackwards during the ...

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    80HISTORY OF BANKS.as a national or public institution, or which isore~n be,connected in anyway, with p.artypolitics.,A change took. place in the nationaladministration which did not extend to the Bank;thegovernnlent were of one party in politics,andthose \vho controled the Bank, of another.Unluc...

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    HISTORY OF BANKS ..81more or less openly encouraged, byn~merouscapitalists in all our cities,"tho had no stockinthe old Bank, but who hoped to beallo\ved somein the new one; · though Inany of these samepersons, when they found it impossible to get anew Bank, sa,v fit to come out as the most...

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    82HISTORY OF BANKS.changes.In fact, it had purchased goldenopinions from all kinds of people ; andit wasargued\vith irresistible force, thatif a NationalBankwerenecessary,-~hichat that time seem-edto be admitted on allhands,-it ·was muchbetter to continue theold one, which had beelltried and pro...

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    HISTORY OF BANKS.8SAmerican Quarterly waseither enlisted, or elseentered as a volunteer.The principal coun-sel of the Bank made speeehes and held polit-ical meetings allover the ceuntry ; and theBank printed and distributed avast number ofpamphlets in its o,vn defence, and attackingthe administra...

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    84HISTORY OF BANKSabroad touching that matter; and some foolishattempts were made to interrupt the operationsof the· distant branches.The battle \vas fought out on both sides, withequal courage, and '\\Tith equal contempt for theordinary rutes of vulgar morality.But the vic-tory, or apparent vic...

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    BfSTORYOFBANKS.85alarm there.Nor wasthat alarmunreasonable.\Vithin the last three years, the business of theBank had been greatly extended, and its circula-tion and loans had very much increased.Itwas afterwards charged uponthe Bankthatithad extended its loans solely for political effect,and to b...

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    86HISTORY OF BANKS.alarm; forall the pres.suresofwhich thepres..entgeneration of merchants had had:any expe-rience, wereof that kind which were causedby,and which indicated, an unsound condition ofbusiness.The ('urtailulent of the National Bank, wasfollowed, bya curtailment on the part ofthelocal...

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    HISTORY OF BANKS.87up the courage and the enthusiasm of this for-lorn hope to the pitch of desperation, it wasjudged necessary to aggravate the panic and dis-tress by every possible means.Public meet-ings were collected, speeches were made, reso-lutions were passed, the newspapers teemedwith the ...

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    88HISTORY OF BANXS.up the alarm till after the fall.elections; but thesignal defeat experiencedon thatocca~ion, com-pleted the overthrow and dispersion of the partyof theBank.But in the mean time an unexpected politicalrevolution had taken place in Pennsylvania; andthe Bank humbled by its defeats...

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    HISTORY OF BAN·IeS.CHAPTER XIX.Present State of American Industry and Trade.89THEpanic of1833-34, was merely an acci-dental and temporary interruption, produced notby the course of trade, but by the course ofpolitics, andbusiness presently resumeditsvigorous and onward progress.I ts expansionwit...

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    RISTO·BY OF BANKS.state of things,it is necessaryto look back-,yards.The commercialhistory of the U nitedStates,since the adoption of the federal constitution,maybe .divided into fourperiods.From 1792to 1808,the commerce·and agricultureof thecountry,enjoyedth~ artificial stimulusof ,anEuropean&...

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    BIS'1'ORY OF BANKS.91selves both here and·abroad, in the course of1831; since lvhich timewe may ,reekona newera in the· commercial history of America.It is not to be supposed that businesswillcontinue to go on with the same rapid progres-sion forwhich the last sixyears have beendis-tinguished.W...

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    92BIST.ORY. OF B'ANKS.•CHAPTER XX.Banks on ihe Continent of Europe.SU.BSEQUENTtothe explosion of Mr Law'sRoyal Bank, the idea of a .national institutionfor banking, found' no favor in France, so longas the ancient.. regime continued inexistence.The people had no con.fidencein the govern-ment; n...

  • Page 97

    HISTORY OFBANKS.93was conferred the exclusive privilege of issuingDotes to circulate as money. But this exclusiv.eprivilege was only purchased by yielding tothegovernment a very large sharein the .manage-ment of the Bank.The original capital of this Bank; wasforty-five millions of franks., or abo...

  • Page 98

    94HISTORY OF BANKS.ed in France to the level of liberal arts, and itis among men. engaged in those employments,that her rulers and legislators are sought andfound.The great advantages. ,vhich may be derived.from banks, and the facilities to business, whichthey may ·bemade to afford, have been al...

  • Page 99

    PAR TSEC 0 N D.ADE~fONSTRA'rION OF THE ADVANTAGES AND NECES-SITY OF FREE COMfETITIuN, IN THE BUSINESS OFBANKING.IN T RODU C T ION.With respect to the business of banking thereare two inquiries of principal interest and inl-portance.First, What system of banking is most ad-vantageous to the public...

  • Page 100

    96HISTORY OF BANKS.deemed worthy of notice.Bank directors havebeen satisfied with taking· care of themselves.The' public interest has been little thought of.. I shall first present a sketch of the Received.Theory ofbanking, together with the principalobjections to which. it isliable~I shall then...

  • Page 101

    HISTORY OF BANKS.CHAPTERI~The Received Theory of Banking.97THEfirst thing is, to get a charter. One fromthe General Government, with exclusive privi-leges, and aclause prohibiting the grant of anyother bank, isesteemed best of all.But sucha charter is.a non-such not easy to be got.Next best is aS...

  • Page 102

    98HISTORY OF BANKS.Obstinate opposers may be silenced by the prom-ise of a certain number of shares in the stock,-which shares, if very obstinate, they must beallowed to keep without paying for.Things being properly prepared, a petition istobe presented to the legislature, representingthatin the ...

  • Page 103

    HISTORY OF BA.NKS.99Problem.Having a capital of one million,how shall thebank be able to lend two millionsand upwards, so as to make dividends of twelveor fifteen per cent?Solution.Get amillion of notes or upwards,into circulation.The bank can then lend onemillion in coin or the notes of other ba...

  • Page 104

    100HISTORY OFBANKS.two; SOof a fourth, a fifth, &c.This state-ment nlakesit veryclear;-according to theprinciples of the theoryI am nowexplaining,-how sacred aduty it is on the part of all exist-ing banks, to oppose by all waysand meanswhatevert thecreation of any new banks, whichin fact, are...

  • Page 105

    HISTORY OF BANKS.101must not be re-issued; the notes of other banksmust be sent off as fast as received and thespecie demanded, that we may have the.where-withal to replenish our empty vaults.Our cir-culation must be diminished one tenth, onequarter, one, third, one half, according to cir-cumstan...

  • Page 106

    102HISTORY OF BAN-KS.other.With the "money thus obtained, 'we havebought up property at the low prices; and asbusiness revives, our pockets begin to growheavy.And before long, business does revive.Thefailing being over, confidence is presently restor-ed.The low prices area temptation topur-c...

  • Page 107

    HISTORY OF BANKS.103those who depended upon it for loans, are ruin-ed by its stoppage;. and theholders of the notes,unable or too impatient to wait, are generallyobliged, or induced, to dispose of them at agreat discount.Perhaps they are bought up bythe very agents' of· thebank.Such, in general ...

  • Page 108

    104HISTOllY OF BANKS.could.It is the same tothe country as an ac-tual creation of capital; it isin fact, call-inginto activity acapital hitherto dormant.Where the circulation consists solely inbank-notes, there is anet addition to the capital ofthe country, nearly or quite equal to the entireamou...

  • Page 109

    RISTOBY OF BA.NKS.105icate and necessarily dangerous nature,-deli-cate and dangerousI mean accord'ing to thetheoryof bankingnow under consideration,-it is the experimental perception of thisfac~"onthe part of theC'ommunity, which has enabledthe banks tobear up against all the real and allthe...

  • Page 110

    106'H-ISTORY OF BANKS.ing of capital went on as securely for the bor-rowers, as it does profitably for the lenders, therewould seem to be no very reasonable objectionsto it;. for howevera spirit of vulgar envy mightdeclaim against the excessivegainsof thebanks, it might be answered, that the hone...

  • Page 111

    mSTORY OF BANKS.107sense, become of little or no avail,-for the.wisest plans, andthe most judicious arrange-ments, may be defeated by an unexpected con-traction of bank loans, which no one could fore-see, and against whichi~ is impossible toguard.These respectable qualities lose the estimationto ...

  • Page 112

    108HISTORY OF BANKS.false confidence in its o\vn good fortune, thisre..metly is omitted, and accommodations are con..tinued, the relief is only momentary; for thebank, if it continues todiscount, must presentlystop payment; and that stoppage not only putsa sudden period to its accommodations, but...

  • Page 113

    HIST-O·RY OF BANKS.109ings ; but wherever it is an object to eV.ade them,the dishonest easily find the means of doing so.In the case now supposed, the loans of the bankare founded solely upon its circulation; and anything whicp drives its notes home, puts a totalstop to its business.But with suc...

  • Page 114

    110HISTORY OF BANKS.CHAPTER II.New Theoryor Banking.THEreasons which have caused the preciousrnetals to· be so generally adopted as nloneyfthat is, 1st, asa measureof value,2nd, asamediumof exchange, ate mentioned in everytreatise upon political economy.Itis to be ob-served, that notwithstanding...

  • Page 115

    HISTORY OFB4NKS.111hIeto suddeq Jluctuations, thanthat ofanyother thing which is an articleQf trade.Thissteadiness of supply, is principally o,ving to thedurability of the. precious metals; fOFit nlustbe- recollected that we understandby supply,the whole quantity of the article in question, inexi...

  • Page 116

    112HISTORY OFBA~KS.and ·:fin·eness.Still, their employment for thispurpose is subject to some very serious difficul..ties.I. Notwithstanding the small ratio whichthe bulk of the .precious metals .bears to theirvalue, yetwhere sales and purchases are large,the bulk of metallic money, the trouble...

  • Page 117

    HIS'TORY OF BANKS.113One Venetian merchant wished to transportcoin into England to buy 'wool ; anotherVene-,tian merchant had lately sold broadcloarhs inEngland, and wished to transport hiscoin toVenice.In this state of things,it occurred tothese two merchants that it would be possibleto get alon...

  • Page 118

    114-HIstoRY OF BANKS.due.As the bill passesfromhand tohand,thetitle and property in the coin whichit describes,passeswith it.It is a maxim ofthe commonlalv, that delivery is essential toa sale;but asit is not easy to take up a ship, a warehouse, orafarm, and deliverit overbodily to the purchas..e...

  • Page 119

    HISTORY OF BANKS.115no difficulty in purchasing. with those bills,whatever products the country affords.2. It is flUther to 'be observed, that this in-ternationalmedium of bills ofexchange, has agreat advantage overeoin, not only in eonve...nienGe, but in economy.Gold is an expensivemedium.If it ...

  • Page 120

    116HISTORY OF BANKS.individllal time, can hardly be appreciated '\vith-outthe help of the infinitesimal calculus, yet thesum ofaU these atoms makes up at last)thetotal substance of the thing.3. I have shown in the preceding part of thistreatise, that metallic currencies are liable toacertain degr...

  • Page 121

    HISTORY OF BANKS.117the demand for a medium with which to carryit ,ou.Trade, this year, is in acertain condi.tion; 'and, if we ,supposeno .other medium ofexchange butcoin, coin assumes acertain rela-tive value exactly proportioned to the demandfor it.Next year, trade falls off one half,butthe qua...

  • Page 122

    118HISTORY OF BANKS.the U nitedStates to pay for foreign goods.Butthe demand for a circulating medium remainsthe sanle as,before.Thesupply being dinlin..ished,the relative value rises, and allpricesmust fall.Asimilar influx of gold would pro-duce acorre~ponding fallin its localvalue, anda corresp...

  • Page 123

    HISTORY OF :BANKS.119tain thatI have got a positive value for mygoods; hut whenI take abill of exchange inpayment,I remain exposed toa degree of un-certainty,-for perhaps the bill willnever bepaid.Butexperien~e h()s proved that this oqjectionto~n international currency ofbills of exchange1is of v...

  • Page 124

    120HISTORY OF BANKS.every body knows, that should the holder of the.note happen to want the coin, he has only tostep into State Street, present his note at thebank, and carry the coin off at his leisure. Buta·Philadelphia bank-note does not pass inBos-ton, in the sameway.Few people in Boston,wan...

  • Page 125

    HISTORY OF BANKS.121a net addition· to the ·active capital of the coun-try in which they circulate, nearly equivalenJ/tothe total value ofthe goldand silver which theydisplace.'Vhen to this saving of interest, is add-ed the saving in wear and tear,and the freedomfrom all those consumptive cause...

  • Page 126

    1ftHISTORY OFBANKS.changes of those articles must be equally un"certain; andequally uncertain must be thede-ttland for a mediuln whereby to make thoseexchanges; andif the supply of thatmediumremains thesame,-which to a great extentitmust do, so long as it consistsonly of coin,-then the relat...

  • Page 127

    HISTORY OF BANKS•123.bills of exchange, the risk is so small, thatit is~ot possible' to calculate it; and thereforeitdoes not produce any effect that can be appre-ciated, upon the value of bank-notesas a circu..lating medium.Thus far we observe a perfect correspondencyin character and effects, ...

  • Page 128

    124HISTO:atr OF BANKS.How explain this remarkable difference?The' effects of a thing depend upon t,vo cir-cumstances; first, the inherent nature of thething; second, the ,mode of its operation.Now I have already proved that the inherentnatureof bills of exchange andof bank-notes,is precisely iden...

  • Page 129

    HISTORY OF' BANK'S.125and thatit would be far better to entrust thisimportantafiair to the sole management C\odcontrol of an institution, whose amount of cap-ital, great credit, respectabilityof characterandex~ent of information give itevery<advantage;-<suppose, that upon the strength of th...

  • Page 130

    126HISTORY OF BANKS.chapter, that the whole evils of the presentbanking system gro\v out ofthe singlefact, thatthe banks lend a great deal nlore moneythantheyhave got.They lend money that does notbelongto them; they,are thegreatest debtorsamong us ;0£course, they are the first to feela pressure ...

  • Page 131

    HISTORY OF BANKS.121falling, in the first instance, upon a limited .DUm-ber ofindividuals, the customers of the bank,would greatly distressthem,. and causeseveralof thelIl to fail.Suppose now that in place of this one bank,.we have one thousand hlittle i,iddling banks,"with a capital of one ...

  • Page 132

    128HIS1'ORY OF BANKS.tation of specie, instead of being such abug-bear to the banks as it ·now is, would be a posi-tive advantage to them.No doubt the largerpart of the sum exported would be drawnfro-mthe ban-k vaults; buta certain portionwouldalso beabstracted from the circulating curren-cy; an...

  • Page 133

    HISTORY OF BANKS.129folly of its managers; and so faras the publicis concerned,it would be of comparativelytri-fling consequence whether itfailed or not.Theamount ofnotes which anyone bankcould getinto'circulation,\vould betoo sInaUto make itsfailure any object to the stock.. holders.Theforced lo...

  • Page 134

    ISOHISTORY OF BA.NK·S.wards ofone-quarter.On the sameday, therewere in l\'1assacbusetts,sixty-six banks, with an~gregate capital .. of$20,420,000; l<YdllS$28,-590,000;circulation 94,,747,000. Asimilar runin lVlassachusetts would have obliged the bank$there, to have diminishedtheirloans,one-tw...

  • Page 135

    HISTO.RYOF BANKS.181of $4,447,000, therewas the ,responsibility ofsixty-six banks, and a pledge of capital to the.amountof$20,4.20,000.In Rhode Island,fora circ-ulation of $673,000, there was the re-sponsibility of forty-seven banks, and a pledgeof capital to the amount of96,148;000. Whichof thes...

  • Page 136

    132HISTORY OF BANKS.sympathetically, from the numerous disordersoftheir ricketty s"isters.Capitalists nlust 1>e leftas much at liberty to invest their money in abank as in a cotton mill.This work is going 011,by the almost dailycreation of new banks; andnot\vithstanding thecroakings of th...

  • Page 137

    HISTORY OF BANKS.133institutions will be generally dispensed, like therefreshing dew, to eve·ry nook and. torner of thecountry.It is objected that new banks cannot be ofany great "use, fdr" they do not create or bringinto activity, any new capital.It is true the,do not; but they greatl...

  • Page 138

    1MHISTORY OF BANKS.his just shareof accommodation.But it\villgenerally happen, that whilesome arepreSS~dtor money, others will have little occasion for i ;and the funds ofthe bank can beappropriatein turn, to the reliefand aid ofall.In themean time all thesefioating capitals are secure-ly investe...

  • Page 139

    HISTORY OF BANKS.155applications for the charter of manufacturingcOD)panies.Some cautiouspersons are terribly alarmed·at the ideaofthis illimitable creationofbanks;and at the liberty thus given to any body andevery bod}T, to run in debt tothe public.Ifthese good people could be inducedto reflect...

  • Page 140

    136HISTORY' OFBANKS.Iwered.Those who strain at ·a gnat, are mar-vellously adroit at swallowing a camel.Every branch of trade was once amonopoly.The progress of knowledge has. banished thatwretched system fronl every sort of businessexcept the business of banking.Before long itwill be obliged to ...

  • Page 141

    HISTORY OF BANKS.187liJle the awkward and clumsysubstitutes whichhave been foisted into their place, butby a con-stant, steady, gpntle,yet inevitable pressure,which does better than setth.ings to righ,t,-which prevents them fromever' gettingwrong.CHAPTERm.or a National Bank.IT will 'be obvious, t...

  • Page 142

    138'HISTORY OF BANKS.standing the gold currency partyhave actedintbe'mean time, 'instrict alliance with the mon-opolists of bankcharters; and have filost stren--DOusly joined in the opposition to the creation ofany new banks.These gold currency peoplebear a most desperate hatred to all monopolies...

  • Page 143

    HISTORY OF BANKS.139the engines are already atwork, he opens hiseyes at last, and ba\vls fire! as lustily as thoughhe had been the first to make the discovery.Is it notfar better todisnliss yourwatchmantand so to arrange things that. it shall be for theinterest of the rogues to watch and betray e...

  • Page 144

    140RISTO-BY OF BANKS.ed to throw its whole capital into the businessof domestic exchanges; and if it has lost thepublic deposits, it still holds some eig,ht millionsof money belonging to the United States.In a previous chapter, I have given the his-tory of the business of domestic exchanges.To th...

  • Page 145

    HISTORY OF BANKS.141ed with that of banking, that it will not be easyto open one to free competition, without open-ing the other -also.A National Bank would dono more goodthan any otherbank with anequal amount of capital.It is not the bank Iobject to, but the exelusive privileges withwhich it is ...

  • Page 146

    '142HISTORY OF BANKS.in Boston for the redemption of their notes; andthe whole business of balancing the accountsbetween the Boston and the country banks, isintrusted to one bank, which receives from theothers, areasonable compensation for its trouble.The result of this silnple and excellent ar-r...

  • Page 147

    APPENDIX.THEpreceding work was written in the autumn of1836, and issued from the press in January, 1837.Since that time, a great crisis has taken place in thebusiness affairsof the United States; and that crisis,at first sight, would seem to prove that the writerwasmistakenin so much of the 19th ...

  • Page 148

    iiAPPENDIX.English mercantile houses, known as theJlmericanBankers.However prosperous and profitable the business inwhich they were engaged, what wonder that the sud-den call to refund in cash, so largea part of the actualcapital employed by them, should have overwhelmedmany with bankruptcy, and ...

  • Page 149

    APPENMS.iiiderstood in this country,till within a short timesince,and subsequentlyto thepublicatioD ofthis .Treatise.The aspect inwhich it presented itself to the writer,was that in whichit appeared, at the time the Trea-tise was written, viz. as a struggle between the Bankof England, and the joi...

  • Page 150

    ivAPPENDIX.the failure of most of the great houses in the SouthWest, engagedin the cotton trade.Nevertheless, thearticle of itself, wasin a declining condition ;-produc-tionhad overrun consumption,and a fall of price wasinevitable.The cotton planters of the South WesternStateshad obtained in New ...

  • Page 151

    LETTERT 0HIS E X eEL LEN C YMARCUS MORTON,ONB!M!iING AND THlE CURRENOf.BYR. HILDRETH,.AUTHOR OF UBAND, BANJUNG, AND PAPER 1I0KEyt-"LIFB OF HARBISOK,"&C. &C.BOSTON:P'RINTED BY KIDDER &WRIGHT.1840.

  • Page 152

    Entered according to act of Congress, in the year 1840,BY RICHARD HILDRETH,In the Clerk's Officeofthe DistrictCourt of MassachasettL

  • Page 153

    LETTER TO GOVERNOR MOR'rON.SIR,-In your excellency's late Address to the Legislatureof Massachusetts, your excellency has gone at very con-siderable length, into the matterof banks and the currency.As I amwell convinced that touching that important and in-teresting subject, your excellency has fa...

  • Page 154

    There has beena great deal said of late, touching thepow-er and the duty of government to regulate the currency.This power and duty seem to be taken for granted by mem-bers of all political parties, and the great pointof contro-versy appears to be, ,vhether this po\verof regulation shall beexerci...

  • Page 155

    lars; and this same ratio wHl also determine the value of thesilver dollar, that is to say, the quantityc~ other articleswhichit ,viII command in exchange.No,v,it is evident that in the case supposed, whichsoeverof the above articles shall vary in amount, whether the flout,thebee~ the pork, the p...

  • Page 156

    6thing.The price of Maine timber lands rose, because thecommunity, by some means or other,-and the community,vith all its wisdom, is very easily gulled,-was induced toaffix to those lands a very exaggerated value.The notiongot about that ,vhoever o\vned these lands, o\vneda greattreasure, ,vhich ...

  • Page 157

    7This state of things stimulated the cultivation of cotton tothe highest pitch, and presently the supply began to out-runthe consumption.This rendered a fall of prices inevitable.The greatcotton speculators contrived to staveit.off forawhile, by storing the accumulating bales.But the crash of1837...

  • Page 158

    8state of the currency, which in the origin of the troubles, couldhave had but an imperceptible influence.In fact, it wasthese false calculations and the derangement of trade andprices ,vhich grew out of them, that deranged the currency,and it was not untiUhe currency had been thus deranged, that...

  • Page 159

    9were absurdly high three or four years since.Public opin-ion rushes from one extreme of blunder to another.It sel-dom stops half way.'Vith respect to prices, there is aninfluence exercisedoverthem, upon \vhich political econonlists have not yet d \velt;but an influence \vhich exerts a controliug...

  • Page 160

    10the action of an)? government; and ifany government shouldDO\Vundertake to establish and to enforce any other standard,itwould be found a work of no little difficulty.The Arner-can Congress and the French Convention, exertedall theirpo\vers in vain, in attempting to establish, the one, continen...

  • Page 161

    11have coin, are accllstonlcd to send it to the bank, and to takethe notes of the bank in exchange, as bcing equally valuable,and far nlore convenient.These notes presented at the coun-terof the bank, ,viII at any time command an equivalentquantity of coin, anathe currency of these notes continue...

  • Page 162

    12a reO'ulation be it observed by the way, quite as ,vise and pro-b.found, as if the legislature should grant to a few firms in Courtstreet, and Hanover street, the exclusive right of manufac-turing cotton shirts. This grant, ho\vever ofan exclusive rightto certain corporations to issue 11otes, h...

  • Page 163

    13sequences are common to all similar cases.In this respectthere is nothing peculiar as regards the use of bank notes.Thereis ho\vever one interference ,vith the businessofbanking, \vhich common sense, and thoordinary course oflegislation will justify, and only one.It is usual and highlyproper to...

  • Page 164

    14speculations upon the subject of banks and the currency, andlnore especially your excellency's observations concerningfluctuations in the amount of the currency, and conse- "quent fluctuations in prices and commercial derangements,are founded upon false and insufficient vie\vs.1 am alsocom...

  • Page 165

    15onfy one single just idea, surrounded and overshadowed byan almost infinity of errors.I hope therefore, that your ex-cellency ,vill not take it amiss, if I advise yc;>ur excellencyto give a serious reconsideration to the ,vhole subject.The great error into ,vhich your eKceUency has fallen,an...

  • Page 166

    16explain all fluctuations in trade, by talking about the plentyand scarcity of gold and silver; and to imagine that by se-curing the community in the possession of a large quantity ofcoin and bullion, they are providing effectually for the sta-bilityof trade, and the steadiness of values.Your ex...