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And it appears to exercise no more influence on the
mind of the issuer than the fear of future punishment
is found to exercise on the majority of those who are
in full possession of health and vigor." On the con-
trary, the production and the supply of material com-
modities, possessed of intrinsic value, will not ordina-
rily be in excess; because the creation of such pro-
ducts involves an expenditure of capital, and the em-
ployment of industry; and because an excess in the
supply/by causing a fall in price, whilst it benefits the
consumer, entails a certain loss upon the producer.

But it is said that, under a system of free compe-
tition, banks of issue will effectually check each other,
and thus prevent all undue expansions in the volume
of the currency, and all injurious fluctuations in the
value of its denominations.

Now, admitting, (the admission being in direct con-
tradiction to all observation and to all experience,)
that the banks of a community ordinarily act, not in
combination and in concert, but in competition and in
conflict with each other; still, as the object common
to all banks, conducted with a reference to the promo-
tion of the interests of the share holders, is, as far as
possible, to extend their circulation and to lend their
credit, and thus to swell their profits, this competition
can manifestly have ultimately no other effect than to
secure to each bank its just proportional share of the
general circulating mass, and, also, its proportional
share of any increase in that circulation of any ad-
dition to the general mass; and the only consequence
of an individual bank magnanimously declining to



280 APPENDIX.

take its portion of growing profits, would be " that the
rejected business would go to some other bank."

Thus it is that, as with an expanding currency,
banks emulously blow up the inflation, so, when
the subsequent and surely consequent reaction has
commenced, and when, from the external pressure of
a demand for coin to be exported, constituting the
only really operative check upon excessive issues,
they are compelled to contract, they vie with each
other in the haste with which they curtail. The com-
petition, so far as it has an existence, consists at one
time in a struggle to push out, and at another time in
a convulsive effort to draw in as many notes as possi-
ble. This very elasticity of the circulation this pow-
er of suddenly expanding and contracting its volume,
which has so often been represented as forming one
of its highest recommendations, thus rendering it emi-
nently dangerous and explosive, and conferring upon
it unequalled powers of mischief. This is the consti-
tutional disease, the incurable taint inherent in the
system, and against the destructive consequences of
which no effective preventive has hitherto been, or is
likely hereafter to be discovered, short of such a radi-
cal change as shall abolish the exercise of the abstract
right to issue, and thus suppress all paper money; or
as shall bring about an entire and complete separation
between the conflicting, the incompatible and the irre-
concilable functions of banks of issue and of banks of
discount of issuers of currency and of mere dealers
in capital. Hence the entire correctness of the obser-
vation of one of the most able of our own writers,
and one, too, of the most discriminating and logical
ofreasoners: "That the general tendency to an ex-
pansion of the currency, to be succeeded of course by
a contraction of it, is much more considerable where
many than where a few banks are competing with,
each other to obtain as large a portion of the circula-
tion as they respectively can." Hence, also, the just-
ness of the conclusion of a foreign authority: u That



APPENDIX. 281

the more banks are multiplied, the greater is the
chance of fluctuations in their issues, and consequently
in prices, credit and so forth." It is not, on that ac-
count, the less true that so long as the system is al-
lowed to exist, in the language of the same distin-
guished economist, " If the names of the partners in
deposite banks, or in banks issuing notes on security,
be given; and if these partners be bound jointly and
severally to the whole extent of their fortunes for
their engagements, nothing more can be done by law
for the protection of the public interests. Every thing
else should be left to individual sagacity and pru-
dence."

Thus the guarantee against abuses, as it is perfectly
evident, is found not in the competition, but in the
thorough responsibility of the parties for whose bene-
fit the issues are made, and who derive the whole of
the profit accruing from the gainful process of convert-
ing paper into money of exchanging promises for
commodities^

In this unrestrained responsibility, and not, as is
frequently and absurdly taken for granted, in any
amount of competition real or imaginary, lies much
of the secret of the comparative stability, solidity and
security of the Scotch banking associations. To insist,
however, upon the interference of the Legislature to
regulate the number of banks, as it would be justly
liable to other objections, so it would be to advocate
the odious scheme of granting monopolies and exclu-
sive privileges; and to all the evils inherent in our
present vicious banking system, to add the abuses of
special and of partial legislation. " The proper objects
of government," as stated by a writer of the most
penetrating sagacity, and one of the most powerful
and conclusive reasoners in favor of the free trade
theory, "are to provide that paper money be perfectly
secure, and at all times convertible into the coin which
it represents; and that the danger of over issues
should be met by adequate preventive, or remedial
24*



2S2 APPENDIX.

checks." And as remarked by another economist, as
the result of the most matured experience and of the
closest observation: " The knowledge of who the
partners are in a bank, and their unlimited responsi-
bility, are the only securities that, speaking generally,
are worth a pinch of snutf. If these cannot protect
the public from fraud or loss, nothing else will; and
the question will corne to be, not whether the system
should be reformed, but whether it should be abated
as an incurable nuisance." In the language of Mr.
Ricardo: "Is it not inconsistent that government
should use its power to protect the community from
the loss of one shilling in a guinea, but does not inter-
fere to protect them from the loss of the whole twenty
shillings in a one pound note."

To exonerate individual partners from the payment
of partnership debts, is to encourage both rashness
and fraud. " Under any circumstances," in the words
of an able writer and experienced banker, " it seems
inexpedient, as regards the public, and unjust as re-
gards private bankers, to favor especially joint stock
banks, by making a particular law in their behalf."
And the practical operation of a legislative act grant-
ing to associated parties the privileges and the immu-
nities conferred by their being invested with the cor-
porate character is, that " they may contract debts to
any amount, while they are bound to pay only to a
specific amount; their charters thus vitiating the fun-
damental principle of all business, and the essence of
all confidence, viz: the integrity of contracts. This
surely maybe termed a premium upon great villany."
In favor of individuals and of associations of indi-
viduals, the claim has been advanced that they have
the right to issue their paper promises intended as a
substitute, and in fact, forming a substitute for the
coin of the country for the currency of the constitu-
tion.

As a mere theoretical question a metaphysical
abstraction, it may, perhaps, be admitted that such a



APPENDIX. 283

right may be classed among those which have been
termed natural. A similar concession might be made
as to the right to coin metallic money. It is not, how-
ever, the less true that both the justice and the expe-
diency of the unrestrained and unconditional exercise
of the right has been assumed, rather than attempted
to be proved. In former and in barbarous ages, pow-
erful individuals have been allowed to coin money;
but at more civilized periods, and among enlightened
nations, the right to coin has always and everywhere
been assumed and exercised by the supreme autho-
rity, to the entire exclusion of all participation of indi-
viduals in the discharge of a function properly described
as sovereign. Hence, although it may be pushing the
argument too far to assert that there are " no grounds
for any claim of natural right in any individual to
furnish, by his own "notes, the whole or any part of
the currency of the country," it is undoubtedly true
that the argument in favor of the policy of govern-
ment assuming to itself the exclusive control over the
metallic money of the country, is, at least, equally
conclusive against allowing individuals to manufac-
ture and to issue that which forms, and which is in-
tended to form, the almost universal substitute for
that money.

Thus the right to issue the substitutes for metallic
money, intended to circulate in the place, and as the
representatives of the precious metals, can be derived
only from the right to coin that metallic money.
" The exclusive power of regulating the metallic cur-
rency of the country would seem necessarily to imply,
or more properly to include, as part of itself, a power
to decide how far that currency should be exclusive
how far any substitute should interfere with it, and
what that substitute should be." If this were not
true, it must necessarily follow that the prerogative
of coining money, which has every where been exer-
cised by the sovereignty, might be restrained, impeded,
counteracted and defeated by the action of individu-



284 APPENDIX.

als or of associations. In the words of Mr. Tooke, a
practical and scientific writer of the highest reputation:
"Hitherto the legislature has restricted individuals
under the severest penalties, from establishing private
mints, and uttering metallic money of intrinsic and
indestructible value; yet, with a degree of inconsistency
which strikes us as most extraordinary the more at-
tentively we consider it, our law-makers have per-
mitted individuals to establish private banks of cir-
culation and to utter paper money which a breath
of panic may at any time, destroy. On the same
principle that the government protects the public
against the probable insecurity which might arise
from individuals being permitted to utter metallic cur-
rency, it should guard against the more probable, nay
certain insecurity which is created when individuals
utter a paper currency. In every civilized country,
supplying and regulating the circulating medium is a
function of the sovereign prerogative." And the au-
thor of the admirable " Essay on Value/' who is
among the most able and zealous of the advocates of
the doctrines of free trade in their widest application,
states it as an obvious and incontestable truth, that
government having undertaken the supply of the cur-
rency, " in order to facilitate or insure the accom-
plishment of its purposes, private persons may be
very properly restrained from any proceedings which
would tend to defeat them." * * * * "If then go-
vernment has determined, for any reason, to have a
metallic currency, consisting of certain coins, here
would be a plain ground for restricting the dealer in
money from such issues of paper as \vould defeat the
design."

" The business of banking," observes an acute rea-
soner and a practical banker, " is one thing; that of
issuing a paper money is another thing. There is no
necessary connection between the two. The bankers
in London and Paris are bankers strictly so called.
They are lenders of their own and other people's



APPENDIX. 285

money. They must obtain it by industry or by loan,
before they can lend it. They do not make it. The
business of making arid then issuing a paper money
on loan is very different from that of obtaining a paper
money on loan, and then re-lending it." The two
operations, although thus clearly distinct and widely
different, are, by those who find their account in the
present vicious system, sedulously sought to be con-
founded. To banks of issue is confided the creation
of the circulating medium. The office of banks of
discount is to assist in the distribution of that me-
dium. The duty of the former is to issue the circula-
tion upon such principles as shall cause its amount,
and the value of its denominations to vary, as they
would, were the currency metallic. The only object
of the latter is so to use their available funds, as to
secure upon their employment the highest rate of
profit.

Thus it is that in all civilized countries the issue of
notes for circulation is always with the consent, ex-
press or implied, of the supreme authority, which, at
its discretion, regulates and restrains this issue. Hence
in all cases in which the discharge of this important
function has been committed to individuals, or to asso-
ciations, there arise the questions What are the con-
ditions upon which the trust shall be delegated?
What are the regulations and restraints proper to be
imposed for the protection of the public? Evidently
such, and such only, as, while they interfere in the
smallest possible degree with the free application of
capital, and the natural direction of industry shall
have for their object to assimilate, in all desirable
properties, these issues to a currency composed of the
precious metals, and as far as practicable to confer
upon the former the steadiness and the stability in
value which, being inherent in the latter, have made
them the universally received medium of exchange,
and the "commodity of contract" preferred to all
others. Prominent and most efficacious among these



286 APPENDIX.

conditions is the unlimited individual liability of the
issuing parties.

Let it be observed, however, that whilst the unlimi-
ted responsibility of individuals is, with entire pro-
priety, represented as furnishing to the public a very
strong guarantee against fraud; and as holding out to
noteholders and to depositors increased protection
against all danger of ultimate loss; the principle affords
little or no security against those alternate expansions
and contractions in the volume of the currency, and
those fluctuations in the value or purchasing power of
its denominations, which tend to give to all commer-
cial undertakings a gambling character; but which are
inseparable from the issue, by trading associations, of
paper substitutes for metallic money; and which ne-
cessarily flow from a system of banking and of cur-
rency essentially vicious in its constitution, and defec-
tive in the very elements of its organisation. We
admit the correctness of the assertion of Sir H. Par-
nell: " That all the public has lost by bank failures in
Scotland, since banks were first established, amounts
to 36,444, and that no such thing ever occurs in
Scotland as a panic." We are satisfied of the truth
of the facts stated by Mr. M'Culloch, that "In 1793
and in 1825, when so many of the English country
banks were swept off, there was not a single establish-
ment in Scotland that gave way." And we may very
satisfactorily account for much of this superior sta-
bility, by the then greater freedom in Scotland of the
banking business: this freedom being enjoyed upon
the only proper condition of the thorough responsi-
bility of the associated parties. We are convinced of
the accuracy of the statement made by the first Lord
of the Treasury and by the Chancellor of the Eng-
lish Exchequer: " That the Scotch banks have stood
firm amidst all the convulsions in the money market
in England." It is, no doubt, true, as affirmed by Mr.
Gilbart, a bank manager of great experience and a
practical writer of established reputation, that " The



APPENDIX. 287

enactment which renders the whole property of every
shareholder answerable for the debts of the bank is
very just and satisfactory. It is satisfactory to the
public and satisfactory to the shareholder." It can
not be denied that whilst in 1837 arid 1838, bank cre-
ditors were every where in this country defrauded by
the depreciation of bank paper, and by the non per-
formance of bank promises; and whilst the same thing
has again partially occurred in 1839; in Great Britain
" neither depositors nor noteholders have lost a shil-
ling." Mr. Bailey, a writer of the very highest cha-
racter for power of logical discrimination, and for pene-
trating sagacity and analytical skill, is clearly in the
right when he asserts that the legislature "acted
wisely in not interfering to lessen," by the grant of
exceptions, " the liability of individuals." Mr. Nor-
man, a prominent director of the Bank of England
and a writer of signal ability, was, no doubt, cor-
rectly informed, when he admitted the "general soli-
dity of the Scotch banks," when he stated, that " insol-
vency was almost unknown among them;" and when
he referred to their well established reputation as " se-
cure places of deposite."

All these authorities (and their number might easily
be extended) are direct in the testimony which they
bear to the justice and the expediency of the princi-
ple of the unrestrained liability of individuals; and
their evidence is conclusive as to the beneficial nature
of the results springing from its practical application.
It is, however, not on that account the less true that
the only infallible test of the soundness of any scheme
of paper issues, is to be found in the identity of the
phenomena with those which would take place with
a currency purely and exclusively metallic, and " it is
as issuers of paper money that the Scotch banks
are chiefly open to criticism. In times of prosperity
they push out their notes and credits to an undue ex-
tent, and are consequently compelled to diminish
them as violently when circumstances alter thus in-



288 APPENDIX.

flicting on the public oscillations in the currency much
more violent than could occur with a metallic circu-
lation, or with paper regulated on sound principles."

Of the Scotch banks, as of all others assuming the
discharge of incompatible functions, and organised
upon the unsound and pernicious system of making
their credit issues in competition, and in the discount
of commercial securities bearing interest, it may with
truth be affirmed that " in periods of excitement and
rising prices, they stimulate speculation unduly, and
afford a spectacle of specious and factitious prosperity;
while, when the recoil takes place, they sweep the
solvent and comparatively prudent trader into the
same net with the rash adventurer, and lead to awful
and wide-spread ruin." Hence it is that in periods
of commercial difficulty, " no country is said to suffer
from insolvency more severely than Scotland, whilst
of Manchester, " where banks of issue have never
existed until recently, and then to a small extent," it
is remarked that " it furnishes an interesting and in-
structive contrast."

It is also notorious and not denied that in Scotland
the use of gold is almost unknown, and that under
the appearance of a nominal competition, a real com-
bination exists against demands for specie and for the
maintenance of an exclusive paper currency.

" There is no principle in the law better settled than
that whatever has an obvious tendency to encourage
guilty negligence, fraud or crime, is contrary to public
policy." And such, in the very nature of things, is
the tendency of allowing the trader, and especially
the banker, to limit, to throw off, or in any way to
restrict his natural responsibility or his legal liability.
From this liability there should be no escape, "not
even by express promise or special acceptance any
more than by notice."



APPENDIX. 2S9



H.



HISTORY OF THE MONEY CRISIS OF 1S18.

Extracts from the report of the Committee of the Senate of Pennsyl-
vania^ appointed to inquire into the extent and causes of the present
general distress.

IN the Senate of Pennsylvania, December 8, 1819.
A motion was made by Mr. Raguet and Mr. Grosh 1
and read as follows, to wit:

Whereas it appears that a scene of distress and
pecuniary embarrassment unexampled informer years,
has been of late exhibited throughout this common-
wealth. And whereas, at a period of general cala-
mity, it is natural for the people to expect from the
legislature such an investigation into the causes which
have produced the evils under which they labor, as
may be likely to mitigate their sufferings, or at least
to prevent their recurrence. And whereas, a proper
regard for the interests of posterity, as well as of our
constituents requires, that an exposition of the actual
condition of our suffering fellow citizens, as well as
of the causes which have been instrumental in pro-
ducing their distress, should be recorded in durable
characters on the journals of this house. Therefore,

Be if resolved, That a committee be appointed to
inquire into the extent and causes of the present gene-
ral distress, and to recommend to the consideration of
the legislature, such measures as in their opinion may
be calculated to alleviate the public suffering, and to
prevent the recurrence of a similar state of things.

On motion, made on the 10th of December, said
resolution was again read, considered and adopted,
and

Ordered, That Messrs. Raguet, Hurst, Eichelber-
25



290 APPENDIX.

ger, Markley, M'Meens, Rogers and Breck, be a
committee for the purpose therein expressed.

January 29, 1820. Mr. Raguet from the foregoing
committee, made report, which was read as follows,
to wit.

In the performance of a duty of such high import-
ance as that which has been entrusted to your com-
mittee, they have felt it incumbent on them'to enter at
large into the investigation of the subject contem-
plated by their appointment, in order that the people
of the present day may be correctly informed as to
the extent and causes of the evils by which they are
oppressed, and that the records of the house may be
furnished with a document, which may afford evi-
dence at a future day of the miseries which it is pos-
sible to inflict upon a people by errors in legislation
and by the bad administration of incorporated insti-
tutions.

In ascertaining the extent of the public distress,
your committee has had no difficulties to encounter.
Members of the legislature from various quarters of
the state have been consulted in relation to this sub-
ject, and their written testimony in answer to inter-
rogatories addressed to them by the committee, has
agreed with scarcely an exception, upon all material
points. With such a respectable weight of evidence
added to that which has been derived from the pro-
thonotaries, recorders and sheriffs of the different
counties, from an intercourse with numerous pri-
vate citizens residing in different parts of the state, as
well as from the various petitions presented to the
legislature, your committee can safely assert, that a
distress unexampled in our country since the period
of its independence, prevails throughout the common-
wealth. This distress exhibits itself under the varied
forms of

1. Ruinous sacrifices of landed property at sheriff's
sales, whereby in many cases lands and houses have
been sold at less than a half, a third, or a fourth of



APPENDIX. 291

their former value, thereby depriving of their homes
and of the fruits of laborious years, a vast number of
our industrious farmers, some of whom have been
driven to seek in the uncultivated forests of the west,
that shelter of which they have been deprived in their
native state.

2. Forced sales of merchandise, household goods,
farming stock and utensils, at prices far below the
cost of production, by which numerous families have
been deprived of the common necessaries of life, and
of the implements of their trade.

3. Numerous bankruptcies and pecuniary embar-
rassments of every description, as well among the
agricultural and manufacturing, as the mercantile
classes.

5. A general scarcity of money throughout the
country, which renders it almost impossible for the
husbandman or other owner of real estate to borrow
even at a usurious interest, and where landed security
of the most indubitable character is offered as a pledge.
A similar difficulty of procuring on loan had existed
in the metropolis previous to October last, but has
since then been partially removed.


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Online LibraryCondy RaguetA treatise on currency & banking → online text (page 24 of 27)