Thirty Years' View (Vol. II of 2). Benton Thomas Hart
of the capital, and sometimes the whole of it, shall be paid up in gold or silver before the charter shall take effect. This is the usual provision, without any obligation on the bank to retain any part of this specie after it gets into operation; and this provision has too often proved to be illusory and deceptive. In many cases, the banks have borrowed the requisite amount for a day, and then returned it; in many other cases, the proportion of specie, though paid up in good faith, is immediately lent out, or parted with. The result to the public is about the same in both cases; the bank has little or no specie, and its place is supplied by the notes of other banks. The great vice of the banking system in the United States is in banking upon paper – upon the paper of each other – and treating this paper as cash. This may be safe among the banks themselves; it may enable them to settle with one another, and to liquidate reciprocal balances; but to the public it is nothing. In the event of a run upon a bank, or a general run upon all banks, it is specie, and not paper, that is wanted. It is specie, and not paper, which the public want, and must have.
The motion of the senator from Pennsylvania [Mr. Buchanan] is intended to remedy this vice in these District banks; it is intended to impose an obligation on these banks to keep in their vaults a quantum of specie bearing a certain proportion to the amount of their immediate liabilities in circulation and deposits. The gentleman's motion is well intended, but it is defective in two particulars: first, in requiring the proportion to be the one-fourth, instead of the one-third, and next, in making it apply to the private deposits only. The true proportion is one-third, and this to apply to all the circulation and deposits, except those which are special. This proportion has been fixed for a hundred years at the Bank of England; and just so often as that bank has fallen below this proportion, mischief has occurred. This is the sworn opinion of the present Governor of the Bank of England, and of the directors of that institution. Before Lord Althorpe's committee in 1832, Mr. Horsley Palmer, the Governor of the Bank, testified in these words:
"'The average proportion, as already observed, of coin and bullion which the bank thinks it prudent to keep on hand, is at the rate of a third of the total amount of all her liabilities, including deposits as well as issues.' Mr. George Ward Norman, a director of the bank, states the same thing in a different form of words. He says: 'For a full state of the circulation and the deposits, say twenty-one millions of notes and six millions of deposits, making in the whole twenty-seven millions of liabilities, the proper sum in coin and bullion for the bank to retain is nine millions.' Thus, the average proportion of one-third between the specie on hand and the circulation and deposits, must be considered as an established principle at that bank, which is quite the largest, and amongst the oldest – probably, the very oldest bank of circulation in the world."
The Bank of England is not merely required to keep on hand, in bullion, the one-third of its immediate liabilities; it is bound also to let the country see that it has, or has not, that proportion on hand. By an act of the third year of William IV., it is required to make quarterly publications of the average of the weekly liabilities of the bank, that the public may see whenever it descends below the point of safety. Here is the last of these publications, which is a full exemplification of the rule and the policy which now governs that bank:
Quarterly average of the weekly liabilities and assets of the Bank of England, from the 12th December, 1837, to the 6th of March, 1838, both inclusive, published pursuant to the act 3 and William IV., cap. 98:
According to this statement, the Bank of England is now safe; and, accordingly, we see that she is acting upon the principle of having bullion enough, for she is shipping gold to the United States.
The proportion in England is one-third. The bank relies upon its debts and other resources for the other two-thirds, in the event of a run upon it. This is the rule in that bank which has more resources than any other bank in the world; which is situated in the moneyed metropolis of the world – the richest merchants its debtors, friends and customers – and the Government of England its debtor and backer, and always ready to sustain it with exchequer bills, and with every exertion of its credit and means. Such a bank, so situated and so aided, still deems it necessary to its safety to keep in hand always the one-third in bullion of the amount of its immediate liabilities. Now, if the proportion of one-third is necessary to the safety of such a bank, with such resources, how is it possible for our banks, with their meagre resources and small array of friends, to be safe with a less proportion?
This is the rule at the Bank of England, and just as often as it has been departed from, the danger of that departure has been proved. It was departed from in 1797, when the proportion sunk to the one-seventh; and what was the result? The stoppage of the banks, and of all the banks in England, and a suspension of specie payments for six-and-twenty years! It was departed from again about a year ago, when the proportion sunk to one-eighth nearly; and what was the result? A death struggle between the paper systems of England and the United States, in which our system was sacrificed to save hers. Her system was saved from explosion! but at what cost? – at what cost to us, and to herself? – to us a general stoppage of all the banks for twelve months; to the English, a general stagnation of business, decline of manufactures, and of commerce, much individual distress, and a loss of two millions sterling of revenue to the Crown. The proportion of one-third may then be assumed as the point of safety in the Bank of England; less than that proportion cannot be safe in the United States. Yet the senator from Pennsylvania proposes less – he proposes the one-fourth; and proposes it, not because he feels it to be the right proportion, but from some feeling of indulgence or forbearance to this poor District. Now, I think that this is a case in which kind feelings can have no place, and that the point in question is one upon which there can be no compromise. A bank is a bank, whether made in a district or a State; and a bank ought to be safe, whether the stockholders be rich or poor. Safety is the point aimed at, and nothing unsafe should be tolerated. There should be no giving and taking below the point of safety. Experienced men fix upon the one-third as the safe proportion; we should not, therefore, take a less proportion. Would the gentleman ask to let the water in the boiler of a steamboat sink one inch lower, when the experienced captain informed him that it had already sunk as low as it was safe to go? Certainly not. So of these banks. One-third is the point of safety; let us not tamper with danger by descending to the one-fourth.
When a bank stops payment, the first thing we see is an exposition of its means, and a declaration of ultimate ability to pay all its debts. This is nothing to the holders of its notes. Immediate ability is the only ability that is of any avail to them. The fright of some, and the necessity of others, compel them to part with their notes. Cool, sagacious capitalists can look to ultimate ability, and buy up the notes from the necessitous and the alarmed. To them ultimate ability is sufficient; to the community it is nothing. It is, therefore, for the benefit of the community that the banks should be required to keep always on hand the one-third of their circulation and deposits; they are then trusted for two-thirds, and this is carrying credit far enough. If pressed by a run, it is as much as a bank can do to make up the other two-thirds out of the debts due to her. Three to one is credit enough, and it is profit enough. If a bank draws interest upon three dollars when it has but one, this is eighteen per cent., and ought to content her. A citizen cannot lend his money for more than six per cent., and cannot the banks be contented with eighteen? Must they insist upon issuing four dollars, or even five, upon one, so as to draw twenty-four or thirty per cent.; and thus, after paying their officers vast salaries, and accommodating friends with loans on easy terms, still make enough out of the business community to cover all expenses and all losses: and then to divide larger profits than can be made at any other business?
The issuing of currency is the prerogative of sovereignty. The real sovereign in this country – the government – can only issue a currency of the actual dollar: can only issue gold and silver – and each piece worth its face. The banks which have the privilege of issuing currency issue paper; and not content with two more dollars out for one that is, they go to five, ten, twenty – failing of course on the first run; and the loss falling upon the holders of its notes – and especially the holders of the small notes.
We now touch a point, said Mr. B., vital to the safety of banking, and I hope it will neither be passed over without decision, nor decided in an erroneous manner. We had up the same question two years ago,