The Merchants' Magazine and Commercial Review

IMPORTANCE OF THE SUBJECT-DIFFICULTY OF UNDERSTANDING IT-FOUR OPERATING CAUSES-MONETARY QUESTION INVOLVED IN POLITICS-PREJUDICE AGAINST PAPER MONEY AND BANKS-WHAT 13 MONEY-BANKS-PROPOSITIONS OF HON. A. WALKER IN PART CONSIDERED THE USES OF BANKSFLUCTUATIONS OF MONEY IN QUALITY AND QUANTITY-PAPER MONEY HAS NOT THE COST VALUE OF COIN-DOES PAPER MONEY DRIVE SPECIE OUT OF THE COUNTRY?-PAPER MONEY STIMULATES AND DEPRESSES CREDITS-IS PAPER MONEY THE CAUSE OF BANKRUPTCIES ?-DOES PAPER MONEY AFFECT PRICES THE QUESTION DISCUSSED-CONDITION OF THINGS IN 1857 COMPARED TO A WORK SHOPSTATISTICS OF SPECIE-AN ESTIMATE OF THE AMOUNT OF BANKING CAPITAL AND PAPER MONEY AT DIFFERENT PERIODS-PAPER MONEY DID NOT PRODUCE THE ORISIS OF 1857-AMOUNT OF PROPERTY IN THE UNITED STATES-FOREIGN DEBT OF THE UNITED STATES.

It is now more than a year since the commercial and financial crisis of 1857 broke upon us. It came suddenly and unexpectedly. It was intense, wide-spread, and painfully disastrous. A few persons were expecting what is called a "change of times," a depression in business, and an unusual scarcity of money, but no one had the slightest conception of the reality. The time that has elapsed since it occurred favors an impartial investigation as to the cause or causes, both because the feeling produced has somewhat subsided, and because facts have been developed throwing light on the subject.

The importance of understanding this matter can scarcely be overestimated. It was a great public calamity, and not occurring in consequence of war, pestilence, or famine, nor from any extraneous or outside influences, and full statistics existing in regard to all the great interests of the country for many years, there is every reason why the subject should be so thoroughly understood as to produce general unanimity of opinion among intelligent men in regard to the causes. But how different is the fact. There are scarcely any two who agree, and especially in detailsmany judge from their own stand-point or experience, not looking at the whole subject; others, and they are numerous, have special theories by which they explain every fluctuation in business-and then the great

mass are ignorant and look outside and beyond themselves-they are right and all else is wrong; this is their reasoning.

There are four great operating causes, or controlling interests, that have undoubtedly exerted, and that do exert, at all times, a marked influence upon the business and the prosperity of the country, namely, our banks, banking, or monetary system; the tariff; speculation and over-trading; and the credit system. Most of the persons who have written on the subject, so far as we have been able to ascertain, have attributed the crisis of last year to some one or all of these causes.

While all these act reciprocally upon one another, and each and all have more or less influence in shaping and directing our business as a whole, we think they have each, respectively, exerted a widely different influence in regard to the crisis of last year. This we propose to consider briefly; and we shall take up these interests in the order in which they are referred to above.

The time was when the monetary system of the country could be discussed on its merits. General Jackson's opposition to the United States Bank caused the bank question to become a political question. At first, it was simply opposition to a national bank-not on its merits, but because it used its influence for political purposes-and approval of State banks. The latter were created in great number, without much regard to the wants of the community, and, not unfrequently, for party purposes, or to insure political ends. All such were in the main, as a matter of course, unsuccessful. "Down with all banks" became the party cry; all good Democrats were expected to oppose banks, and all good Whigs to approve of them. Thus the banking question became a leading party question, and it was discussed in the same spirit that prominent party questions are discussed in times of high party excitement. Prejudice, and not reason and judgment, was appealed to. Triumph was the object, and not truth. Although this question has, to a great extent, ceased to be a foot-ball in politics, there is yet a popular prejudice against banks and paper currency that is ready to attribute all unfavorable fluctuations in business, whether confined to an individual or extending over the country, to them. Much of this prejudice arises from ignorance of the nature and the functions of money, and of banks, and of paper currency.

What is money, and by what laws is it governed? Money consists of gold, silver, and copper coined. It is governed substantially by the same laws that regulate other property. It possesses a real cost value, and is the standard, or measure of money value, or of exchangeable value of all commodities in any and all communities where it is used and circulated as with us. Paper money has no intrinsic value-a bill of $100 is worth no more of itself than a bill of $1. It is a representative of property, or evidence of debt. It is not a measure or standard of value; neither does it influence prices any further than so much credit. It is a substitute for gold and silver, as a check, or a draft, or a bill of exchange, or a negotiable note is. A in Boston wishes to pay $100 in New York; he procures the amount in a bank bill, or a certified check, or in a draft, or bill of exchange, suiting his own convenience, in whatever form he selects; to him it is paper money, more valuable under the circumstances than coin, although it has no cost value, and is simply a representative of property, or evidence of debt. It is a substitute for coin or property. Money, both real and paper, is a motive power in business. It facilitates

business and the exchange of products. Supply and demand, in a measure, regulate its value. The amount required by a community is determined by the amount and the character of its business, the method of transacting that business, the geographical extent over which it is spread, and the facilities of communication. One community of equal population with another may have ten times the amount of money of the other, and still have very much less in proportion to its business wants. Whether money is plenty or scarce is not ascertained by the number of the population, neither is an increase of money or banking capital to be determined by comparing the amount at one period with that of another. It is regulated by the amount of business-this is the only true criterion. Banks are the aggregation or association of previously acquired individual wealth. They do not create wealth of themselves any more than does a plow or a hoe. They aid and facilitate business as a steamengine aids and promotes mechanical production. Business exists and banks are required; they are not the forerunners but the followers of business. Bus ness is made or created in a community, and a bank is required as a place of deposit, to collect and to facilitate the transmission of funds between different points, and to provide a currency. In these and other ways they aid in creating wealth; they are a labor-saving machine, one of the most important of modern times.

In the few suggestions we propose to make in regard to the influence or agency our banking system and paper money had in producing the crisis of 1857, we do not intend to discuss the whole theory of banks and paper money, but to take a practical view of the working of the system as developed through well regulated banks. It is contended by one class of writers, and they are very numerous, that not only the crisis of last year, but that all disturbances in our financial and commercial affairs, arise directly or indirectly from our banking system. To this class belongs the Hon. Amasa Walker, of this State. He takes extreme or ultra views of the subject. He published a series of articles in this Magazine, ali but one prior to the last crisis, discussing the points at issue. We propose to refer to these articles, not considering every point, but some of the more prominent ones, rather as preliminary to the main question. Mr. Walker is an able writer, has studied and taught political economy, and has had a large experience in business, and he has undoubtedly made the most of his case.

We begin with his article in the August number of 1857, on "Mixed Currency-its Nature and Effects."

He assumes-1. That a mixed currency is fluctuating, both in quantity and quality.

2. That not having the cost value of gold and silver, it can perform well only one function of money, to-wit, that of medium of exchange.

3. That it is not correct as a standard of value, consequently, it is local in its use-money at home and "moonshine abroad.”

4. That it causes an extension of credits, demand for foreign products, and the export of specie.

5. That it stimulates and depresses credits.

6. That it produces bankruptcies, which, he says, occur "just in proportion to its expansibility and contractibility."

These points are argued somewhat at length, and a variety of bank statistics are given by way of illustration and proof. He says, "fixing

our eye steadily on these great facts," (namely, the fluctuations of a mixed currency in quantity and quality,) "we are enabled to account for all those frightful convulsions in the monetary world which we know take place," such as "overtrading," "speculation," "gambling," "recklessness," etc., etc. It is very clear from this language that Mr. Walker believes our banking system to be an unmixed evil-in fact, the root of all evil, commercially and financially considered.

The first point, to-wit, "the fluctuations in quantity and quality of a mixed currency," is extremely important. Much of the error and prejudice concerning banks arises from not understanding clearly the rules or laws that regulate the issuing of bank bills and the true criterion of their value. In the main, supply and demand regulate their amount and their exchangeable value, or what is the same thing, their "quality."

A bank is established for its dividends, and to facilitate business. It is clothed with limited and well-defined powers, and is managed by, or under the control of, a board of directors. It has four sources of profit-its capital, its deposits, its circulation, and its exchanges. Its circulation, that is, the amount in bills it can have out at any one time, is limited by law, and depending upon the amount of specie on hand. The amount of its discounts is also restricted by law, and, as a general thing, cannot exceed at any time twice the amount of the capital. From them its profits are chiefly derived. When they can be increased and kept up to the limit without issuing bills, as they can in case of large deposits, the bank prefers not to issue bills, and in many instances, where the law allows it to use those of another bank, it does not. It is a common opinion that a bank can, and that it does, at pleasure, increase and diminish its circulation; and that the banks do capriciously affect the money market in this way. This is a great mistake. The true interest of the bank lies in having its customers, and the public generally, successful; consequently it acts with caution and prudence, doing all it can to promote the public good, consistently with taking care of itself. It never issues bills gratuitously, nor without securing or putting into its vaults their value. Every bill going from the bank is a debt against itself, payable on demand; and it is in the hands of the public, who, as it regards the bank, are jealous, unfriendly, and uncharitable.

The interest of the bank, and that of the public, depend reciprocally upon each other; the bank will do all it can in safety to accommodate the public; more than this the public have no right to expect, nor the bank to grant; and it is not only untrue, but absurd, to say that the bank increases or diminishes its circulation capriciously. It might be said with as much propriety that a prudent and responsible merchant buys and sells his goods in the same way. A merchant, in making his purchases, goes into the market remembering that there is a pay-day; in selling, he keeps steadily in view the question of getting his pay; and, not only so, of getting it in time to meet his own payments. This is the principle of the bank. They both may, and do, make mistakes-infallibility is not an attribute of humanity. We find a great fluctuation, as Mr. Walker says, in the amount of bank circulation, not only at periods distant from one another, but at different seasons of the same year, and also in different sections of the country, and he produces a variety of statistics in proof. This fluctuation we regard as perfectly natural, forming no argument against a paper currency. If paper money of itself made the corn grow,

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The Merchants' Magazine and Commercial Review, Volume 40