AND H O II T I C U L T U U A L REGISTER 



^ 



PUIILtSHBD BY JOSEPH BllECK & CO., NO 52 NORTH MARKET STREET, (Agricultural Warehouse.) 



vol.. XIX. 1 



BOSTON, WEDNESDAY EVENING, SEPTEMBER 9, 1840. 



t»ro. 10. 



N. E. FARMER 



HANKS AND THE CREDIT SYS I EM. 

 No. II. 



Tlie first e.\cliiinL'.es of men were of wlrit wo 

 call biuter, in which one arlicle was triven direclly 

 for another — as a skin for a bushel of grain, or 

 grain or sUins for a cow ; or other forms, in which 

 articles were exchanged in kind. This, for various 

 and obvious reasons, was a very inconvenient mode 

 oftrartic. Men presently found that some fixed 

 representative of value wms needed, by which ex- 

 chanijes could be made with more ease and with 

 e.iactness. The precious melals have been adopt- 

 ed by all civilized and semi-civilized nations as this 

 representative of value, tliis medium or standard of 

 exchange; and by the.se means business or ex- 

 change or traffic is carried on with fractional pre- 

 cision. In themselves the precious metals are not 

 so valuable aa iron or lead or copper ; that is, they 

 are not susceptible of being applied to so many of 

 the practical use< of life ; but from their scarcity, 

 and their little liability to corrosion or wear, they 

 have been universally adopted as a currency or me- 

 dium of traffic and exchange. It will be obvious 

 upon reflection that the first and an indispensible 

 requisite in a currency or standard of value or me- 

 dium of exchange is, that it should have an intrin- 

 sic, admilted, fxed and ptnnanent value. This, we 

 repeat it, is essential ; and must never be lost sight 

 of. Without this, every thing would be thrown 

 into contusion. The power of no government on 

 earth can sustain a currency without this basis of 

 confidence. The previous metals alone furnish 

 tliat basis. Governments have often attempted by 

 arbitrary enactments to fix a scale of prices, and 

 to make other things than gold and silver a legal 

 tender in payment of debts ; but the consequences 

 have always been disastrous. The currency thus 

 attempted to be sustained by the force of law, has 

 gone down in proportion to the violence of the ef- 

 forts made to niainlan it. 



A bank, to have the confidence of the public, 

 must rest its credit upon its perfect capacity to 

 meet all its obligations promptly and perfectly ac- 

 cording to their tonor : if its notes are on demand, 

 whenever they are presented ; if on time, when 

 that time arrives. There must be no evasion, or 

 hesitation, or delay. It is allowed to issue its cred- 

 its in the form of notes, usually payable on demand 

 at its banking house. If these notes are expected 

 to liavo currency as cash, they may be as gpod as 

 cash by being able always to command it. 



Banks have been established on various founda- 

 tions : sometimes on the pledge of real estate; 

 sometimes on the pledge of public stocks; some- 

 times on the association of individuals, who united 

 their joint credit and gave their own personal secu- 

 rity for the redemption of their notes. Such a cap- 

 ital is in the first place necessarily Huctualing in 

 its value ; and in the next place, such bills are not 

 convertible into specie, and therefore do not an- 

 swer the purpose of exchange. Banks which rest 

 exclusively upon mere personal credit, excepting 



in some such extraordinary cases as that of Girard, 

 are utterly unsafe. A bunk is safe only when it 

 rests upon a S|iecie basis — a basis of gold and sil- 

 ver, and is prepared to cash all its demands on pre- 

 sentation. 



The State understood this in the first creation of 

 banks; and therefore it provided that no bank 

 should go into operation until two thirds of its cap- 

 ital stock should be paid into the vaults of the bank 

 in good faith, there to remain lor the use of the 

 bank in case a run should bo made upon it, and for 

 the security of the public against the insolvency of 

 the bank. This wholesome provision, though re- 

 maining untouched on the statute book, has long 

 since been utterly disregarded in the modern sys- 

 tem of banking. It is obvious that there could be 

 no actual loss to the public from keeping tliis spe- 

 cie on hand, because it would be represented in 

 full by the notes of the bank ; but had this whole- 

 some provision been strictly maintained, we should 

 never have heard of broken banks and the suspen- 

 sion of specie payments. 



But it is said, since the multiplication of banks, 

 this has been impossible, for no bank can keep out 

 but a comparatively small portion of its capital, 

 owing to the severe competition of other banks. 

 This competition has undoubtedly its advantages ; 

 but in any case tiie same proportion of specie to its 

 issues should be maintained ; and no bank ought 

 to be considered as safe, nor should be tolerated by 

 law, where it has not always on hand a specie cip- 

 ital at least equal to two thirds of its issues or 

 discounts. If there is a deficiency, it should at 

 once, for the security of the community, supply 

 that deficiency. It may be said that its creditors 

 are all good, and the obligations of the bank will 

 in any event be made secure. This may be true 

 and ought always to be true; but the objection in 

 the case is, that this property is not convertible. 

 The true value (jf a bank note consists in being at 

 once convertible into gold and silver; the moment 

 it loses this capacity it at once depreciates in value, 

 and the loss falls upon the holde ; and sometimes 

 to his most serious inconvenience. 



It may be said again, that this condition of re- 

 taining such an amount of .•-•pecie in the vaults of 

 the bank is incompatible with the number of banks 

 in th-s tState or country. The answer to this is 

 then, that we have too many banks. We have 

 pushed the credit system too far. The truth is, all 

 credit to be sound must rest upon a solid basis. 

 There is no mystery in this case. Men make a 

 great flourish about the principles of banking, as 

 though they were so complicated that a common 

 man could not understand them. A common man 

 can understand the principles of common honesty 

 in any case ; and if the mysteries of banking dif- 

 fer at all from these, we leave it to those to ex- 

 plain who understand them. A merchant's credit 

 is sound just in proportion to his ability to meet 

 his demands exactly according to their tenor, and 

 no farther. Extraordinary and unlooked for emer- 

 gencies may arise, when he may ask an indulgence 

 from his creditors. He will seek it with great hes- 

 itation. Corporations should be held to a severer 



rule; and though we confess there may be great 

 cases, such for example as the unexpected occur- 

 rence of a war, or some contingency, whigli might 

 threaten at once to rob them of all their specie; 

 yet in general they should be held to an absolute 

 enforcement of the law. 



Banks, then, resting upon a specie basis, and 

 whose credit is secured by all the guards which 

 human wisdom or virtue can devise, for nothing 

 short of this should satisfy a wise legislator and an 

 intelligent community, are of an immense benefit 

 to such a community as ours. Besides the conve- 

 nience of their notes and the facilities which they 

 give to exchange, the ci ncentration of capital so 

 as to re.ider it available to all classes where indus- 

 try and enterprise are to be encouraged, and the 

 actual increase of capital by fifty per cent., which 

 can be done with safety under proper management, 

 render a most important service to the poor, indus- 

 trious and productive classes — advantages of which 

 they can avail themselves by no other means. The 

 banks of Massachusetts and New England, with 

 some few most disastrous and humiliating excep- 

 tions, have hitherto maintained an undoubted credit 

 throughout the Union ; and they have been in a 

 great degree the foundation of the prosperity of 

 New England. 



We shall speak hereafter of some of the abuses 

 of batdimg and the credit system, if there are those 

 who are willing to read our lucubrations. H. C. 



August 21. 



BANKS AND THE CREDIT SYSTEM. 

 No. III. 



We promised a continuation of our remarks on 

 these exciting topics. They may be worth little ; 

 they may be worth nothing. They may show only 

 a profound ignorance of what aie technically called 

 the principles of banking. We can promise noth- 

 ing other than the impressions and opinions of a 

 mind honestly inquisitive af\er truth ; of one whose 

 knowledge of them has never extended to any of 

 the mysteries of the art ; and who has in the case 

 no party or political feelings whatever to gratify. 

 As we have before said then, let them pass for what 

 they are worth. 



A bank, in the first place supposes, that there is 

 an actual accumulation of capital upon which it is 

 to be founded ; otherwise it has no substantial basis. 

 It certainly is not enough for the security of the 

 public that certain individuals, however respecta- 

 ble and reponsible, pledge to the community their 

 own personal credit and issue their notes of hand 

 as currency. No such bank as this would be re- 

 lied on. Each of these individuals is liable to 

 failure. 'I'he notes might be paid on demand or 

 not, as it might happen ; and that, which is first of 

 all things demanded in a bank, a foundation of per- 

 fect confidence, would be wanting. The object of 

 a bank is to loan money ; but what sort of a bank 

 is that which has no money to loan. The credit 

 of a bank must be unquestioned. Its notes must 

 be regarded as equivalent to their nominal amount 

 in specie, and at any time convertible into specie 



