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the world had ever seen. It had a monopoly for twenty-one
years ; its profits were very large, and the benefits that it
conferred on an impoverished country were immense. Other
companies came into existence, and the jealousies were extreme ;
every bank was eager to break the rest, or at least injure their
credit. In 1752 better counsels prevailed. Legislation was had
to put an end to some abuses, including the practice of refusing
payment of notes till six months after demand, and the issue of
very small currency. The banks associated closely in a sort of
national clearing-house, for mutual protection and mutual sur-
veillance. The bi-weekly exchange of claims in Edinburgh was
adopted, serving as a powerful check upon unsafe business. No-
where in the world has an extensive banking system been carried
on with so little loss to the public, and no country has derived
so much benefit from banking.

The distinguishing feature of the Scottish banks is their
Bystem of cash credits. Whoever can get two satisfactory
bailsmen to endorse his bond, can open an account for its amount
in the bank. He is charged four per cent, on the amount that
he actually draws, and is allowed two per cent, on sums deposited
when the bank is in his debt; that is, after every day's transac-
tions his account is balanced and he is paid interest at the lower
rate or pays it at the higher rate, — according as he is the bank's
creditor or its debtor — till the next transaction alters the balance.
But the payments are mostly in notes, and not by check; paper
money, therefore, plays a large part in Scotch banking, as notes
constitute almost the entire currency of the kingdom. They are
not aristocratic notes like those of England, of £5 and upward,
but very largely £1 notes for the use of the people. It is to
exchange these notes and pay their balances in coin that the
banks meet twice a week, and thus they are enabled to form an
estimate of the extent and safety of the busiuess of each. In


1826 the English ministry proposed, "for the sake of uniformity,"
to abolish this useful and popular currency, but the proposal was
received with such an outburst of opposition from all classes and
parties (Sir Walter Scott took a very prominent part), that it was
abandoned. In 1845 all further increase in the amount of this
paper-money was forbidden — i. e., it was enacted that, however
great Scotland's need fur more money in the course of her growth,
she should have no more. She has now actually less, as the failure
of a Glasgow bank has caused the lapse of several hundred thou-
sand pounds. In times of panic these cautious Scotchmen
exercise the higher caution of mutual help. In the run on the
Union Bank of Edinburgh in 1857, there was in Bank street a
double flow of gold — frightened depositors carrying away their
money to other banks, and bank clerks carrying it back again.
The results fully justify this confidence ; for over a century the
public have lost nothing by the banks and the banks have lost
nothing by the public. Stockholders have lost in a very few
instances through dishonest or silly management.

§ 178. The first Bank of France was established in 1716,
when the country was bankrupt, business suspended, and the
misery of the people at its height. In two years it had revived
trade of every kind and restored the public credit. Unfortu-
nately its projector and manager, a Scotchman named John Law,
held the theory that a country could not have too much money,
and that it could safely have and usefully employ as much as
the entire value of its property. Sustained in his schemes by
the Regent, he extended the circulation to four thousand millions
of dollars, bought up the royal revenues, the colonies and the
entire foreign trade of France, and went into immense specula-
tions in trade. To keep up the value of his notes, false divi-
dends were declared, and specie was forbidden to pass as money
except in small amounts. Of course the attempt utterly failed,
and the bubble burst, leaving France in a worst plight than

In 1776 another bank was started, but not under that name,
as France was afraid of banks. This one shared in the great


Struggle carried on by Turgot and Necker, to redeem the public
credit — and in the failure of the struggle. It came to an end
with the Revolution, and was succeeded by a joiut-stock bank,
established by the Parisian bankers.

The present Bank of France was founded by Napoleon in
1800; it was given a complete monopoly of banking — a state of
things that has been again restored through the provincial banks
being united to it. Throughout its history it has been charac-
terized by public spirit and a generous policy. Thus it did its
utmost to carry French commerce through the exciting times
of 1S4S without reducing its discounts, ; and when the govern-
ment authorized it to suspend specie payments, it really never
did so. It has repeatedly raised bulliou by loan or purchase to
meet a drain, instead of making the business community meet
the emergency for it. Since 1857 it has adopted the principle
of raising the rate of discount in stormy times, but apparently
it does not materially decrease their amounts. For this reason
all sorts of disasters are predicted for it by English authorities on
finance. France suffers less from commercial crises than Eng-
land or America, because less engaged in foreign trade or indeed
in wholesale operations of any sort. Her currency is mainly
specie, and the extent of the credit system in proportion to her
population and wealth is very small.

§ 179. In France, Belgium, Germany and lvussia. the pro-
blem of establishing banks on the credit of real estate has been
successfully solved, and these banks are now very widely estab-
lished to grant discounts to landowners and thus promote agri-
cultural improvement. The great difficulty and expense of
proving land-titles, and of legally recovering money loaned on
land, seemed to condemn this class to pay high rates of interest.
In Scotland, however, there is a very simple system of land-
registry, and recovery of debts is a cheap and easy process.
The Scotch banks, by their cash credits secured by bond, have
solved the problem for their agricultural customers. The land-
owners of Silesia, finding themselves utterly impoverished by
the wars of Frederick the Great, adopted a scheme proposed


to them by a Berlin merchant, named Biiring. They unitedly
pledged the whole land of the province to the government,
which raised money on its own credit as if for a public loan,
and lent it to the association at the rate they paid for it. This
loan is put on the market in the form of hind-stock, guaranteed
by the government and transferable at pleasure. Besides this
public association, private ones have been formed in great
numbers, and have done much to improve the agriculture of the__
Continent. These private land-credit banks take mortgages
bearing a fixed rate of interest upon landed property, paying for
those mortgages not in money, but in their own obligations bear-
ing a lower rate of interest, which obligations the mortgagor
sells, mainly to small local capitalists.

§ 180. Although proposals were very early made for the
establishment of joint-stock banks of issue in the American
colonies (especially in Boston and in Philadelphia), land bank-
ing was the first that was adopted. The colonial government's
land offices made loans in paper-money " on bond and mortgage"
at low rates of interest, thus furnishing a circulation for local
trade and helping the settler to reclaim his land. The deprecia-
tion of public credit by the vast issues of paper-money during
the Revolutionary War put an end to the practice. But these
colonial issues did not stand at par; they ranked differently in
different colonies, and so gave rise to that curious complication
by which a pound meant one thing on the right bank of the
Delaware, another on the left, but a pound sterling in neither

§ 181. Bobert Morris, a merchant of Philadelphia, was much
struck with the need of a public bank to facilitate the business
of the colony, and was about to ask a charter for one when the
Revolution put a stop to his plans. Being the Superintendent
of Finances during the closing years of the war, he had great
difficulty in raising loans, and proposed to the Continental
Congress his plan for a bank. It was formally approved, a
charter secured from the state legislature, and the Bank of
North America went into operation January 1782. The national


government took a quarter of a million in stock, and borrowed
§400,000 from the bank. It did much to restore public credit and
stimulate industry; it gradually became independent of govern-
ment, while still rendering needed aid. In 1785 its charter was
withdrawn by the state legislature by the votes of the country
members, who wished to see the state's credit restored and the
land offices reopened, — and who thought the bank was in the
way. It continued operations without a charter, and was re-
chartered in 1787, the farmers having found out their mistake.

Banks were soon after established in Boston, New York and

§ 182. The old Bank of the United States was chartered by
the U. S. Congress in 1791, on the recommendation of Alexander
Hamilton, whose report on the subject is a masterly state paper.
When the charter had expired in 1811, the party of strict con-
struction — i. e., those who believed in giving the general govern-
ment as little power as possible — were in possession of power
and refused to renew the charter. The local banks chartered by
the states alone remained, with capital by no means equal to the
demands upon them. Great expansions were followed by sudden
contractions of the currency, the banks always "protecting
themselves " at the expense of their customers by sudden re-
trenchment of circulation, rather than sacrifice any part of the
large amount of government stocks that they held. Well might
Matthew Carey protest, " that abstracted from all attention to
t lie interests of the community, it is supereminently absurd,
impolitic, and injurious, as it regards the interests merely of the
banks, to press citizens into the vortex of bankruptcy ;" and
" that tin ise sudden vibrations of bank accommodation whereby
money is rendered superabundant at one time and immoderately
scarce at another, are favorable to speculation and the wealthy
alone, — and are pernicious to morals, industry, trade and com-
merce, — that they tend to enrich the wealthy and impoverish
those who stand in the middle and lower walks of life, — in a
word, to make the rich richer and the poor poorer."

Letters to the Directors of the Banks of Philadelphia (1S16).


§ 183. The second U. S. Bank was chartered in 1810, a
charter granted two years previously having been defeated by
the veto of President Madison. Its earlier years covered a period
of great financial prostration (1816-24) ; its later period was
one of great inflation and general speculation (1833-6); the
nine years between were marked by a sober and steady growth
in all the elements of national prosperity. The history of the
bank and its national influence has been the subject of bitter
and protracted controversy. We incline to the view that it
rendered the nation great services in helping it out of the time
of distress, and was in no wise responsible for the inflation and
reckless trading that culminated in the crisis of 1837-8. It
furnished a national currency that passed current in every part
of the Union, at a time when the complexity of a score of
different banking systems, and the existence of numbers of
fraudulent banks, prevented the notes of any other bank from
possessing more than a local circulation. It raised the public
credit by accepting public bonds as subscriptions for bank stock.
It evinced the solidity of its monetary basis by sustaining for
years the attacks of a powerful political faction, headed by
President Jackson. When at last it failed to obtain^a renewal of
its charter, and thus ceased to be a national and became a state
bank, it was at the same time greatly weakened both in actual
resources and in public confidence by the withdrawal of the
government deposits. It engaged in speculations, and the failure
of these, joined to the hostility of the then dominant political
party, involved its ruin, but it cannot be held to have verified
the prophecies of its enemies.

§ 184. From 1836 till the opening years of the recent Civil
War, we had no National Banking system. Every state legis-
lated according to its light, and hardly one of these state laws
evinces any intimate knowledge of the workings of the credit
system. Some had the wisdom to leave their people free to en-
gage in banking to any extent they pleased, under general re-
strictions for the defence of the public who held bank-notes, —
as in Scotland. Others by artificial restrictions kept capital out


of banking, and thus prevented the business community from
getting the amount of accommodation they needed. Thus
Rhode Island, under a free system, had seventy-one banks, or
one for every 2000 of its population, with an aggregate capital
of nearly §15,000,000, and investments and loans of $19,500,000.
Pennsylvania in 1850, under a restrictive system, had but fifty-
three banks, or one to every 40,000 of its people, with a capital
of $20,500, 000, and loans and investments of over $50,000,000.
Khode Island had $100 a head invested in banking; Pennsyl-
vania $8. The legislators who established this state of things,
and conferred the monopoly of banking on a few favored estab-
lishments, thought they had provided for all risks by limiting
the number of bank-notes, and requiring the banks to keep a
fair proportion of specie on hand for their redemption. They
did not see that they had left it in the power of the directors to
create another species of currency without any limit except
ordinary prudence, and yielding large returns for the loan of
the bank's credit. If they saw a huge mass of " deposits " set
over against a somewhat larger mass of " loans and investments "
in the published reports, they probably counted it a sign of the
high confidence that the bank enjoyed ; they never thought of
those deposits as a far more volatile and explosive form of cur-
rency, not issued in engraved notes, but created by a few strokes
of the pen on the credit side of a bank-account. By limiting
the capital invested, they had only furnished the chance and
increased the temptation to excessive discounts, such as the
actual figures show. Nay, they rather forced the banks to go
beyond the bounds of prudence by subjecting them to an intense
pressure on the part of the business community, which would
otherwise have been distributed over a large number of estab-
lishments with a great aggregate capital. For the profits of safe
banking are always large enough to attract thither as much
capital as the business community needs, when the right to
establish a bank is restricted only by such general laws as are
necessary to protect the public.

§ 185. The banks of our three great seaports rendered very


effective service to the government during the opening years of
the war, filling the empty treasury by a large loan of specie, and
upholding the national credit.

The National Banking system which has grown out of Secretary
Chase's financial operations, and now includes all the banks of
issue in the country, recalls many of the features of early banking.
Like the Italian banks, and the Bank of England in its first
stage, the notes are secured by the deposit of government securi-
ties, but with the additional guarantee that the national credit is
fully pledged for their redemption. The banks have a double
source of profit; they receive the interest on the government
bonds, and have besides the profits of their discounts. They are
of course subjected to the closest examination as to the state and
management of their affairs. Those who remember the state of
the currency before the war, or have ever looked into an old
Counterfeit Detector, will be forced to confess that this national
currency has great advantages.

The valid objections to the system are two : (1) The laws to
establish and regulate it are based upon a very imperfect notion
of the credit system, and of the nature and extent of the credit
employed by the bank in business. Like the old state laws,
they take great pains to " hedge in the cuckoo " by limiting the
issues of notes. They do not provide for the grouping of the
banks in local clearing-houses for mutual supervision. They do
nothing to keep the banks from " protecting themselves " in
stringent times at the cost of the business community at large.

(2) The distribution of these banks wa3 an artificial one, and
was becoming more and more so with every year. In the original
assignment the amount of their aggregate issues was fixed at
a given amount and distributed among the states accord-
ing to population. Several of the poorer states were unable to
make use at once of all the amount thus assigned to them, and
after a given date it was distributed among the older and richer
states. Connecticut, Rhode Island and Massachusetts, for in-
stance, got very much more than their share, the Western States
very much less. With every year these poorer states were


growing in wealth and in the need for money, at a rate that sur-
passed the progress of the older states. With every year the
preponderance of numbers and wealth shifted farther westward.
But the new states were tied to just the amount of circulation that
they could put upon the market at that date ; and this, although
they needed far more bank-notes in proportion to the extent of
their business than the older states did, as with them the credit
system is far less perfectly organized. Hence their outcry for
more money, and their opposition to the measures taken to re-
duce the amount of national currency in circulation, unless it
were replaced by some other form of paper-money. So far as this
defect can be obviated without chamrintr the basis of our bank-
ing system, it has been, by recent legislation.

(3) In spite of their bearing the name " national," our banks
are confined to very limited localities in the transaction of busi-
ness. A vast amount of money is paid in transactions between
distant parts of the nation by the cumbersome and expensive
method of drawing and negotiating bills of exchange. The
sales of the Western crops and the purchase of Eastern goods
in exchange is actually carried on as if it were a transaction be-
tween the merchants of two different nations, and sometimes at
an expense of several per cent, premium or discount to business
men. While our present system offers the advantage that the
national currency passes freely through the whole nation, and
keeps the rate of discount down, its incompleteness leaves
great openings for illegitimate business in drawing speculative
bills of exchange based on no real transaction, but negotiated by
collusion between distant banks or firms.

(4) The laws which regulate these banks unhappily tend to
accelerate rather than to retard the centralizing tendencies of
the national money-market, — the tendency to gather the great
mass of the nation's capital into one great monetary centre.
Money flows naturally to the places where it is most abundant,
just as water tends to run down hill; but as it is often the
chief problem in hydraulics to overcome that natural law, so
also is it a chief problem of national economy to bring the


power of capital to bear upon the less developed aud less
wealthy districts of the country.

A national clearing-house established by government, with
branches in every important city, aud an understanding with all
the national banks, would cheapen, simplify and add security to
all our domestic trade. As local clearingdiouses enable the
banks to keep watch upon one another, so would this system
bring the collective banks of each locality under the supervision
of the bauks of other places. The amount of money needed for
the whole business of the nation would be greatly reduced. The
balance due to (or from) any city from (or to) all the rest, could
be ascertained at a central office and then paid from (or to) that
office. There might also be lodged in this national clearing house,
as in the Bank of England, " the power to meet panics by tempo-
rary expansion," which " must be a power capable of being used
promptly and with decision" ( The Nation). Of course this in-
stitution would be debarred from all trading in money or com-
modities, and would be allowed to charge a small per centum or
rather per mille to pay expenses.


National Economy of Finance and Taxation.

§ 186. The differentiation of function that accompanies the
progress of society renders necessary the existence of a body of
paid officials to carry on the government (including police and
military forces), and numerous other expenditures. In the earli-
est time the head of the family — the chief of the tribe — the
lord of the manor — bore rule within limited areas without re-
ceiving fee or salary. He was the lawgiver, the law-ward (lord),
the executor of the law, by reason of his position as chief pro-
prietor or as head of the kindred. But in the growth of nation-
alities a great step was effected when the king's judges rode
circuit through the whole realm, with cognisance of all or nearly
all causes, and when the king's shire-reeve (sheriff) took the
place of the feudal and hereditary count at the head of the
county. It was felt that there was a great gain in the increased
responsibility and in the fairness of professional judges, though
the new system was far more expensive. The remnants of the
old system that exist to this day in England in the unpaid jus-
tices of the peace, chosen from the gentry and clergy, is felt by
the common people to be a great burden. It gives the power
and the interpretation of the laws into the hands of men who
are swayed by the prejudices of a class. "Justices' justice" is
a proverbially poor sort, and one of the chief demands of the
working classes in the agricultural shires is: : ' Give us stipen-
diary magistrates !" So in Ireland, the " assistant barristers " —
professional judges supreme on the local bench, though bearing
a very modest name — are found to be the mainstay of the poorer
classes in all matters of the interpretation of the law.

§ 187. As in the enactment, interpretation and administra-
tion of the laws, so in the enforcement of civil order and the
national defence, — every class of transactions is a source of ex-
pense. The soldier and the policeman discharge duties that


were once incumbent upon every male citizen ; they set the citi-
zen free to employ himself as he will, and he must pay for the
release. And if the state interprets its vocation as extending to
the sanitary and intellectual welfare of the people, the expense
iuvolved becomes still greater. It must take measures itself, or
require municipalities to take measures, to keep its cities in such
a state of cleanliness as shall bring up the average health of the
people to a high standard. It must establish public schools and
colleges, and training schools for teachers, that the rising gene-
ration may not grow up in ignorance. It must set up post-
offices, to promote easy intercourse between the different parts
of the natiou. If it regard religious knowledge as essential to
good citizenship, it may endow a clergy devoted to diffusing it.
In these and a thousand other ways it comes to pass that a civi-
lized nation is obliged to pay for the advantages of a free gov-
ernment, and the state must assess upon itself in some form taxes
to secure a sufficient national revenue. Through fees, fines,
costs of suits, &c, it can throw a part of the burden upon those
who are most immediately concerned, but a large part of it must
be discharged by the community as such.

§ 188. The problem of so imposing taxes that they may be
as little burdensome as possible is one that has perplexed states-

Online LibraryRobert Ellis ThompsonSocial science and national economy → online text (page 17 of 38)