No More Learning

? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
THE
REPORT OF TSB
SECRETARY OF THE TREASURY,
(ALEXANDER HAMILTON,) OK THE SUBJECT OF A
NATIONAJL BANK. Bead <j>>the House of Representatives, Dee. ISA, 1790
NEW-FORK. -
PUBLISHED BY S WHITING & CO 3fo 118, FeMl-<<reet
J S^flDOBT, fir X
-1811.
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
REPOBT,
Treasury Department, Bet. IS, 1790.
jry ohedignceto the order of the HOUSB of REPBJ&SKNTA- TITBS, of the ninth day of August last, requiring the 8B^B&TAKT of theTxs&jwmx to prepare and report, on this day^snch further provision as may, in hie opinion, Jw nt&sfartfar establishing ike PIJBOC C^ptfT-- the said Secretaryfurther
KB8PEOTJULI. T RBPOETS,
HAT from a>convfetion that a . l^ation&l ^ank is aa institution of primary importance to the prosperous ad- ininiittratvrn of thefinances,and would be of the greatest utility IK the operations connected with the support of the Public Credit, his attention has been drawn to devising the plat* pf such ah institution* upon a scale whieh will entitle it to the confidence, and be likely to reader it equal to the evgenejes, of the public ,
Prerisoaljslo entering upon the. detail >>f this, plan, h $ entreats the indulgence of the House* t^ward^. ? on^f|p- Hiaiivary connections naturally arising o*t of the subj^et, which hV hopes Will be deemed neither useless mShf out of place. Public opinion being the ultiniate'wbUer* of eVery measure of government, it can scarcely appear imprepe^ in deference to that, to accompany the origination of any new proposition, with explanations, whieh tij^ superioF in- formation of those to whom it is immediately addressed, would reader superfluous.
It is a fact well understood, that public banks have found admission and patronage among the principal and most enlightened commercial nations. They have <<ue-
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
4
cessively obtained in Italy, Germany, Holland, England, and France, as well as in the United States. And it is a circumstance which cannot but have considerable weight, in a candid estimate of their tendency, that after an ex- perience of centuries, there exists not a question about their utility in the countries in which they have been so long established. Theorists and men of business unite, in the acknowledgment of it-
Trade and industry, wherever they have been tried, have been-indebted to diem for important aid. And government has been repeatedly under the greatest obligations to them, in dangerous and distressing emergencies. That of the United States, as well in some of die most critical con- junctures of the late war, as since the peaee, has receiv- ed assistance from those established among, us, with which it could not have dispensed.
With this two-fold evidence before us, it might be ejs- pected> that there would-be a perfect union of<opmidnS*i>> their favour. Yet doubts have 'been entertained^ jeal- ousies and prejudices have circulated} and though the ex- periment is every day dissipating them, within the spheres in which effects are belt knownj yet there are still'persons by whom they hare not been entirely re- nounced. T o give a full and accurate view of the subject* would be to make a treatise of a reportj but there- are eer-
> tain aspeetsin which it maybe cursorily exhibited^ which dlpperhaps eonduee to a just impression of its merits. ;-- These will involve a comparison of the advantages, with the disadvantages, real or supposed, of such institutions.
, The fol! owil%*are among the principal advantages of a BBank:--
- First^ The augmentation of the active or- productive capital of a*eonntry. Gold and silver, where they are em- ployed merely as the instruments of exchange and aliena- tion, have been, not improperly,. denominated dead stock; but when deposited in banks, to become the basis of a pa- per circulation, which takes their character and place, as the signs or represeatattves of value, they then acquire
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
$?
Mfe, or, in other words, an active-and* productive quality. This idea, which appears rather. subtile and abstract, In a general form, may be made obvious and palpable* by en- tering into a few particulars. It -is evident* for instance* that-the money which a merchant keeps in his chest, wait- ing for a favourable opportunity to employ it, produces nothing till that opportunity arrives. But if, instead of looking it up in this manner, he either deposits it in a bank, or invests it in the stock of a bank, it yields a profit duringtiieinterval, in which he partakes ornot,accord- ing to the ehbiee'he may have made of being a depositor or a proprietor f and when any advantageous speculation oilers; in> order to be able to embrace it, ho has only to
withdraw his. money,if a depositor} or if . a proprietor, to obtain a loajf f com the hanky or to dispose of Ms stock; an alternative seldom or never attended with difficulty, when ih&affairs of the institution are in a prosperous train. His money thus deposited or invested, is a fund upon which himself and others can borrow to a much larger amount. It i s a well established fact, that banks in good credit can eirculate a far greater sum than the actual quantum of their capital in gold and silver. The extent of the possi- ble excess seems indeterminatej though it has been eon- jecturally stated at the proportions of two and three to one. ? This faculty'is produced in various' ways. First-- A,greatproportionoftinenoteswhichareissuedandpass current as . eash, are indefinitely suspended in circulation, from the confidence which each holder has, that he can at any moment turit them into gold and silver. Secondly-- Every loan which a bask makes, is, in itsfifestshape, a. credit given to the borrower on its books, the amount >>f
whieh | t stands <<eady to pay, either in its Own notes, or in gold or silver, at his option. But, in a great number of cases, no actual payment is made in either. The borrow- er frequently, by a cheek or order, transfers his credit to some other person, to whom he has a payment to make ; who, in bis torn, is as often content with a similar credit,, because he is satisfied that he can, whenever he pleases,
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
6
either convert it into cash, or pass it to some other hand, as an equivalent for it. And in this manner the credit keeps circulating, performing, in every stage, the office of money, till it is extinguished by a discount with some person who has a payment to make to the bank, to an equal or greater amount. Thus large sums are lent and
paid, frequently through a variety of hands, without the intervention of a single piece of coin. Thirdly--There is always a large quantity of gold and silver in the reposi- tories of the bank, besides its own stock, which, is . placed there with a view, partly to its safe keeping, and partly to the accommodation Of' an institution, which "is itself a source ofgeneral accommodation. These deposits are of immense consequence in the operations of a bank. Though liable to be redrawn at any moment, experience proves, that the money so much oftener changes proprietors than place, and that what is drawn out is generally so speedily replaced, as to authorize the counting upon the stuns de-
posited, as ah ejfiBe&beftmd; which, concurring with the stock of the bank, enables it to extend its loans, and to answer all the demands for coin, whether in consequence of those loans, or arising from the occasional return of its notes.
These different circumstances explain the manner in which the ability of a bank to circulate a greater . sum than its actual capital in coin, is acquired. This; hdwevefc,
must be gradual; and must be preceded by a firm esta- blishment of confidence; a confidence which may be be- stowed On the most rational grounds$ since the -excess in question will always be bottomed on good' security of one kind or another. This every Well-conducted bank care- fully requires, before it will consent to advance either its money or its credit 5 and where there is an auxiliary capi- tal, (as will be the ease in tile plan hereafter submitted,) which, together with the capital in coin, define the bound- ary that shall not be exceeded by the engagements of the bank, the security may, consistently with all the maxims
ofa reasonable circumspection, be regarded as complete-
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
7
t h e same circumstances illustrate the truth of the po- sition, thajt it is one of the properties of banks to increase the active capital of a country. This, in other words, is the sum of them---The money of one individual, while he
is waiting for an opportunity to employ it, by being either deposited in the bank for safe-keeping, or invested in its stock, is in a condition to administer to the wants of others, without being put out of his own reach, when occa- sion presents. This yields an extra profit, arising front what is paid for the use of his money by. others, when he" could not himself make use of it; and keeps the money itself in a state of incessant activity. In the almost in-
finite vicissitudes and competitions of mercantile enter- prise, there never can be danger of an intermission of demand, or that the money will remain for a moment idle in the vaults of the bank. This additional employment given to money, and the {acuity of a bank to lend and cir- culate a greater sum than the amount ofits stock in coin, are,'to all the purposes of trade and industry, an absolute increase of capital. Purchases and undertakings, in ge- neral, can be carried on by any given sum. of bank paper or credit, as effectually as by an equal sum of gold and silver. And thus by contributing to enlarge the mass of industrious and commercial enterprise, banks become nur- series of national wealth: a consequence, as satisfactori- ly verified by experience, as it is clearly dedueible in
theory.
Secondly. Greater facility to the government in ob-
tainingpecuniary aids, especially in sudden emergencies. This is another, and an undisputed advantage of public banks: one which, as already remarked, has been real- ized in signal instances among ourselves. . The reason is obvious: The capitals of a great number of individuals . are, by this operation, collected to a point, and placed under one direction. The mass formed by this union is, in a certain sense, magnified by the credit attached to it. And while this mass is always ready,,and can at once be put in motion in aid of the government, the interest of
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
8
the bank-to aflbrd that aid, independent of regard to the public safety and welfare, is a sure pledge for its disposi- tion to go as far in its compliances, as can in prudence be desired. There is in the nature of things, as will be more particularly noticed in another place, an intimate con- nexion of interest between die government, and the bank, of-a nation.
Thirdly. The facilitating of the payment of taxes. This advantage is produced in two ways. Those who are in a situation to have access to the bank, can have the as- sistance of loans to answer with punctuality the public (C)alls upon them. This accommodation has been sensibly felt in the payment of the duties heretofore laid, by those who reside where establishments of this nature exist. This, however, though an extensive, is not an universal, benefit. The other way in which the effect here contem- plated is produced, and in which the benefit is general, is the increasing of the quantity of circulating medium, and
the quickening of circulation. The manner in which Che first happens has already been traced. The last may re- quire some illustration. When payments are to be made between different places, having an intercourse of business ?
-with each other, if there happen to be no private bills at market, and there are no bank notes which have a curren- cy in both, the consequence is, that coin must be remitted. This is attended with trouble, delay, expense, and risk. Jf, on the contrary, there are bank notes current in both places, the transmission of these by the post, or any other speedy or convenient conveyance, answers the purpose j' and these again, in the alternations of demand, are frequent- ly returned very. soon after to the place from whence they were first sent; whenee the transportation and re-trans- portation of the metals are obviated; and a more conve- nient, and more expeditious medium of payment is substi- tuted. Nor is this all--The metals, instead of being sus- pended from their usual functions, during this process of vibration from place to place, continue in'activity, and administer still to the ordinary circulation; which of
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
9
course is prevented from suffering either diminution or stagnation. These circumstances are additional causes of what, in a practical sense, or to the purposes of business* may be called greater plenty of money. And it is evident, that whatever enhances the quantity of circulating money, adds to the ease with which every industrious member of" the community may acquire that portion of it, of which he stands in need; and enables him the better to pay his - taxes,' as well as to supply Ms other wants. Even where the circulation of the bank paper is not ge-
neral, it must still have the same effect, though 'in a less degree. For whatever furnishes additional supplies to the channels of circulation, in one quarter, naturally contributes to keep, the streams fuller elsewhere. This last view of the subject, serves both to illustrate the po- sition, that banks tend to facilitate the payment of taxes; and to exemplify their utility to business of every kind, in which money is an agent.
It would be to intrude too much on the patience of. the House, to-prolong the details of the advantages of banks; especially as all those, which might still be particularized, are readily to be inferred as consequences from those which have been enumerated. Their disadvantages, real or supposed, are now to be reviewed. The most serious of the charges which have been brought against them, are--
That they serve to increase usury:
That they tend to prevent other kinds of lending:
That they furnish temptations to over-trading:
That they afford aid to ignorant adventurers, who dis-
turb the natural and beneficial course of trade -.
That they give to bankrupt and fraudulent' traders a
fictitious credit, which enables them to maintain false ap- pearances, and to extend their impositions: And lastly,
That they have a tendency to banish gold and silver from the country.
There is great reason to believe, that on a close and ean- * did survey," it will be discovered, that these charges, are
/
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
10
either-without foundation, or that, as far as the evils the* suggest have been found to exist, they have proceeded from other, or partial, or temporary causes 5 are not inhe- rent in the nature, and permanent tendency, of such in- stitutions; or are more than counterbalanced by opposite advantages. This survey Shall be had, in the order in which the charges have been stated. The first of them
IS--*-
That banks serve to increase usury.
It is a truth, which ought not to be denied, that the me- thod of conducting business, which is essential to bank operations, has among us, in particular instances, given occasion to usurious transactions. The punctuality in payments, which they necessarily exact, has sometimes obliged those who have adventured beyond both their ca- pital and credit, to procure money, at any price, and con- sequently to resort to usurers for aid.
But experience and practice gradually bring a cure to this evil. A general habit of punctuality among traders, is the natural consequence of the necessity of observing it with the bank; a circumstance which itself more than compensates for any occasional ill which may have sprung from that necessity, in the particular under consideration. As far, therefore, as traders depend on each other for pe- cuniary supplies, they can calculate their expectations with greater certainty j and are in proportionably less danger of disappointments, which might compel them to have recourse to so pernicious an expedient as that of bor- rowing at usury; the mischiefs of which, after a few ex- amples, naturally inspire great care in all but men of desperate circumstances, to avoid the possibility of being subjected to them. One, and not the least of the evils in- cident to the use of that expedient, if the fact be known, or even strongly suspected, is loss of credit with the bank itself.
The directors of a bank too, though in order to extend its business and its popularity, in the infancy of aa institu- tion, they may be tempted to go farther in accommodation
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
n
than the strict rules of prudence will warrant, grow more
circumspect of course, as its affairs become better estab- lished,, and as the evils of to(C) grea? facility are experi- mentally demonstrated. They become more attentive to the situation and eonduet of those with whom they deal } they observe more narrowly their operations and pursuits*
they economize the credit they give to those of suspicious solidity; they refuse it to those whose eareer is more ma- nifestly hazardous: In a word, in the course of practice,
from the very uature of tilings, the interest, will make it the policy, of a. bank, to succour the -wary and industrious ; to discredit the rash and unthrifty ; to discountenance both usurious lenders and usurious borrowers. - ,
There is a lending view, in which the tendency of banks will be seen to be, to abridge, rather than to promote, usury. This relates to their property of increasing the quantity, and quickening the circulation, of money. If it
he evident, that Usury will prevail or diminish, according to the proportion which the demand for borrowing hears to the quantity of money at market to be lent; whatever has the property just mentioned, whether it be in the shape of paper or coin, by contributing to render the supply more equal to the demand, must tend to counteract the progress of usury.
But bank lending, it is pretended, is an impediment to other kinds of lending; which, by confining the resource of borrowing to a particular class, leaves the rest of the community more destitute, and therefore more exposed to the extortions of usurers. As the profits of bank stock ex- ceed the legal rate of interest, the possessors of money, it is argued, prefer investing it in that article, to lending it at
this rate ; to which there are the additional motives of a more prompt command of the capital, and of more fre- quent and'exact returns, without trouble or perplexity in the collection. This constitutes the second charge which has been enumerated.
The fact on which this charge rests, is not to be admit- ted without several qualifications ; particularly in refer-
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
12
enee to the state of things in this country. . First--The great bulk ofthe stoek of a hank, will consist of the funds of men in trade, among ourselves, and monied foreigners ; the former of whom could not spare their capitals out of their reach, to be invested in loans for long periods, on mort- gages, or personal security; and the latter of whom would not be willing to be subjected to the casualties, delays, and embarrassments, of such a disposition of their money in a distant country. Secondly, There will always be a conside. rable proportion of those who are properly the money lend- ers of a country, who, from that spirit of caution which usually characterizes this description of men, will incline rather to vest their funds in mortgages on real estate, than in the stock of a bank, which they are apt to consider as a moreprecarious security.
These considerations serve in a material degree to nar- row the foundation of the objection, as to the point of fact. But there is a more satisfactory answer to it The effect supposed, as far as it has existence, is temporary. The re- verse of it takes place in the general, and permanent ope- ration of the thing.
The capital of every public bank will of course be re- stricted within a certain defined limit It is the province of legislative prudence so to adjust this limit, that while it will not be tod contracted for the demand, which the course of business may create, and for the security which the pub- lic ought to have for the solidity of the paper which may be issued bytinebank, it will still be within the compass of the pecuniary resources of the community j so that there may be an easy practicability of completing the subscrip- tionstoi t When this is once done, the supposed effect of ne- cessity eeases. There is then no longer- room for the invest, meat of any additional capital. Stock may indeed change hands by one person selling and another buying; but the money which the buyer takes out of the common mass to purchase the stoek, the seller receives and restores to it. Hence the fature surplusses which may accumulate must take their natural course, and lending at interest must go on as if there were no such institution.
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
IS
It must indeed flow in a more eopious stream. The hank furnishes an extraordinary supply for borrowers, within its immediate sphere. A larger supply consequent- ly remains for borrowers elsewhere. In proportion as the circulation of the hank is extended, there is an aug- mentation of the aggregate mass of money for answering the aggregate mass of demand. Hence greater facility in obtaining it for every purpose.
It ought not to escape without a remark, that as far as the citizens of oilier countries become adventurers in the bank, there is a positive increase of the gold and silver of the country. It is true, that from this a half- yearly rent' is drawn back, accruing from the dividends upon the stock: but as this rent arises from the employ- ment of the capital, by our own citizens, it is probable, that it is more than replaced by the profits of that employ- ment It is also likely, that a part of it is, in the course of trade; converted into the products of our country: and * it may even prove an incentive, in some cases, to emigra- tion to a country in which the character of- citizen is as easy td be acquired, as it is estimable and important. This view of the subject furnishes an answer to an ob- jection which has been deduced from the circumstance here taken notice of; namely, the income resulting to foreigners from the part of the stock owned by them, which has been represented as- tending to drain'the coun- try of its speeie. In this objection, the original invest- ment of the capita], and the constant use of it afterwards, seem both to have been overlooked.
That banks furnish temptations to over-trading, is the third of the enumerated objections. This must mean, that by affording additional aid to mercantile enterprise, they induce the merchant sometimes to adventure beyond the prudent, or salutary point. But the very statement of the thing shows, that the subject of the charge is an occasional ill, incident to a general good. Credit of every kind, (as a species of which only can bank-lending have the effect'supposed,) must be, in different degrees, charge-
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
14
able with the same inconvenience. It is even applicable to gold and silver, when they abound in circulation. But would it be wise on this account to decry the precious metals; to root out credit j or to prescribe the means' of that enterprise, which is the main spring of trade, and a principal source of national wealth, because it now and then runs into excesses, of which over-trading is one ?
If the abuses of a beneficial thing, are to determine its condemnation, there is scarcely a source of public pros- perity which will not speedily be closed.
And thus by contributing to enlarge the mass of industrious and commercial enterprise, banks become nur- series of national wealth: a consequence, as satisfactori- ly verified by experience, as it is clearly dedueible in
theory.
Secondly. Greater facility to the government in ob-
tainingpecuniary aids, especially in sudden emergencies. This is another, and an undisputed advantage of public banks: one which, as already remarked, has been real- ized in signal instances among ourselves. . The reason is obvious: The capitals of a great number of individuals . are, by this operation, collected to a point, and placed under one direction. The mass formed by this union is, in a certain sense, magnified by the credit attached to it. And while this mass is always ready,,and can at once be put in motion in aid of the government, the interest of
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
8
the bank-to aflbrd that aid, independent of regard to the public safety and welfare, is a sure pledge for its disposi- tion to go as far in its compliances, as can in prudence be desired. There is in the nature of things, as will be more particularly noticed in another place, an intimate con- nexion of interest between die government, and the bank, of-a nation.
Thirdly. The facilitating of the payment of taxes. This advantage is produced in two ways. Those who are in a situation to have access to the bank, can have the as- sistance of loans to answer with punctuality the public (C)alls upon them. This accommodation has been sensibly felt in the payment of the duties heretofore laid, by those who reside where establishments of this nature exist. This, however, though an extensive, is not an universal, benefit. The other way in which the effect here contem- plated is produced, and in which the benefit is general, is the increasing of the quantity of circulating medium, and
the quickening of circulation. The manner in which Che first happens has already been traced. The last may re- quire some illustration. When payments are to be made between different places, having an intercourse of business ?
-with each other, if there happen to be no private bills at market, and there are no bank notes which have a curren- cy in both, the consequence is, that coin must be remitted. This is attended with trouble, delay, expense, and risk. Jf, on the contrary, there are bank notes current in both places, the transmission of these by the post, or any other speedy or convenient conveyance, answers the purpose j' and these again, in the alternations of demand, are frequent- ly returned very. soon after to the place from whence they were first sent; whenee the transportation and re-trans- portation of the metals are obviated; and a more conve- nient, and more expeditious medium of payment is substi- tuted. Nor is this all--The metals, instead of being sus- pended from their usual functions, during this process of vibration from place to place, continue in'activity, and administer still to the ordinary circulation; which of
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
9
course is prevented from suffering either diminution or stagnation. These circumstances are additional causes of what, in a practical sense, or to the purposes of business* may be called greater plenty of money. And it is evident, that whatever enhances the quantity of circulating money, adds to the ease with which every industrious member of" the community may acquire that portion of it, of which he stands in need; and enables him the better to pay his - taxes,' as well as to supply Ms other wants. Even where the circulation of the bank paper is not ge-
neral, it must still have the same effect, though 'in a less degree. For whatever furnishes additional supplies to the channels of circulation, in one quarter, naturally contributes to keep, the streams fuller elsewhere. This last view of the subject, serves both to illustrate the po- sition, that banks tend to facilitate the payment of taxes; and to exemplify their utility to business of every kind, in which money is an agent.
It would be to intrude too much on the patience of. the House, to-prolong the details of the advantages of banks; especially as all those, which might still be particularized, are readily to be inferred as consequences from those which have been enumerated. Their disadvantages, real or supposed, are now to be reviewed. The most serious of the charges which have been brought against them, are--
That they serve to increase usury:
That they tend to prevent other kinds of lending:
That they furnish temptations to over-trading:
That they afford aid to ignorant adventurers, who dis-
turb the natural and beneficial course of trade -.
That they give to bankrupt and fraudulent' traders a
fictitious credit, which enables them to maintain false ap- pearances, and to extend their impositions: And lastly,
That they have a tendency to banish gold and silver from the country.
There is great reason to believe, that on a close and ean- * did survey," it will be discovered, that these charges, are
/
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
10
either-without foundation, or that, as far as the evils the* suggest have been found to exist, they have proceeded from other, or partial, or temporary causes 5 are not inhe- rent in the nature, and permanent tendency, of such in- stitutions; or are more than counterbalanced by opposite advantages. This survey Shall be had, in the order in which the charges have been stated. The first of them
IS--*-
That banks serve to increase usury.
It is a truth, which ought not to be denied, that the me- thod of conducting business, which is essential to bank operations, has among us, in particular instances, given occasion to usurious transactions. The punctuality in payments, which they necessarily exact, has sometimes obliged those who have adventured beyond both their ca- pital and credit, to procure money, at any price, and con- sequently to resort to usurers for aid.
But experience and practice gradually bring a cure to this evil. A general habit of punctuality among traders, is the natural consequence of the necessity of observing it with the bank; a circumstance which itself more than compensates for any occasional ill which may have sprung from that necessity, in the particular under consideration. As far, therefore, as traders depend on each other for pe- cuniary supplies, they can calculate their expectations with greater certainty j and are in proportionably less danger of disappointments, which might compel them to have recourse to so pernicious an expedient as that of bor- rowing at usury; the mischiefs of which, after a few ex- amples, naturally inspire great care in all but men of desperate circumstances, to avoid the possibility of being subjected to them. One, and not the least of the evils in- cident to the use of that expedient, if the fact be known, or even strongly suspected, is loss of credit with the bank itself.
The directors of a bank too, though in order to extend its business and its popularity, in the infancy of aa institu- tion, they may be tempted to go farther in accommodation
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
n
than the strict rules of prudence will warrant, grow more
circumspect of course, as its affairs become better estab- lished,, and as the evils of to(C) grea? facility are experi- mentally demonstrated. They become more attentive to the situation and eonduet of those with whom they deal } they observe more narrowly their operations and pursuits*
they economize the credit they give to those of suspicious solidity; they refuse it to those whose eareer is more ma- nifestly hazardous: In a word, in the course of practice,
from the very uature of tilings, the interest, will make it the policy, of a. bank, to succour the -wary and industrious ; to discredit the rash and unthrifty ; to discountenance both usurious lenders and usurious borrowers. - ,
There is a lending view, in which the tendency of banks will be seen to be, to abridge, rather than to promote, usury. This relates to their property of increasing the quantity, and quickening the circulation, of money. If it
he evident, that Usury will prevail or diminish, according to the proportion which the demand for borrowing hears to the quantity of money at market to be lent; whatever has the property just mentioned, whether it be in the shape of paper or coin, by contributing to render the supply more equal to the demand, must tend to counteract the progress of usury.
But bank lending, it is pretended, is an impediment to other kinds of lending; which, by confining the resource of borrowing to a particular class, leaves the rest of the community more destitute, and therefore more exposed to the extortions of usurers. As the profits of bank stock ex- ceed the legal rate of interest, the possessors of money, it is argued, prefer investing it in that article, to lending it at
this rate ; to which there are the additional motives of a more prompt command of the capital, and of more fre- quent and'exact returns, without trouble or perplexity in the collection. This constitutes the second charge which has been enumerated.
The fact on which this charge rests, is not to be admit- ted without several qualifications ; particularly in refer-
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
12
enee to the state of things in this country. . First--The great bulk ofthe stoek of a hank, will consist of the funds of men in trade, among ourselves, and monied foreigners ; the former of whom could not spare their capitals out of their reach, to be invested in loans for long periods, on mort- gages, or personal security; and the latter of whom would not be willing to be subjected to the casualties, delays, and embarrassments, of such a disposition of their money in a distant country. Secondly, There will always be a conside. rable proportion of those who are properly the money lend- ers of a country, who, from that spirit of caution which usually characterizes this description of men, will incline rather to vest their funds in mortgages on real estate, than in the stock of a bank, which they are apt to consider as a moreprecarious security.
These considerations serve in a material degree to nar- row the foundation of the objection, as to the point of fact. But there is a more satisfactory answer to it The effect supposed, as far as it has existence, is temporary. The re- verse of it takes place in the general, and permanent ope- ration of the thing.
The capital of every public bank will of course be re- stricted within a certain defined limit It is the province of legislative prudence so to adjust this limit, that while it will not be tod contracted for the demand, which the course of business may create, and for the security which the pub- lic ought to have for the solidity of the paper which may be issued bytinebank, it will still be within the compass of the pecuniary resources of the community j so that there may be an easy practicability of completing the subscrip- tionstoi t When this is once done, the supposed effect of ne- cessity eeases. There is then no longer- room for the invest, meat of any additional capital. Stock may indeed change hands by one person selling and another buying; but the money which the buyer takes out of the common mass to purchase the stoek, the seller receives and restores to it. Hence the fature surplusses which may accumulate must take their natural course, and lending at interest must go on as if there were no such institution.
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
IS
It must indeed flow in a more eopious stream. The hank furnishes an extraordinary supply for borrowers, within its immediate sphere. A larger supply consequent- ly remains for borrowers elsewhere. In proportion as the circulation of the hank is extended, there is an aug- mentation of the aggregate mass of money for answering the aggregate mass of demand. Hence greater facility in obtaining it for every purpose.
It ought not to escape without a remark, that as far as the citizens of oilier countries become adventurers in the bank, there is a positive increase of the gold and silver of the country. It is true, that from this a half- yearly rent' is drawn back, accruing from the dividends upon the stock: but as this rent arises from the employ- ment of the capital, by our own citizens, it is probable, that it is more than replaced by the profits of that employ- ment It is also likely, that a part of it is, in the course of trade; converted into the products of our country: and * it may even prove an incentive, in some cases, to emigra- tion to a country in which the character of- citizen is as easy td be acquired, as it is estimable and important. This view of the subject furnishes an answer to an ob- jection which has been deduced from the circumstance here taken notice of; namely, the income resulting to foreigners from the part of the stock owned by them, which has been represented as- tending to drain'the coun- try of its speeie. In this objection, the original invest- ment of the capita], and the constant use of it afterwards, seem both to have been overlooked.
That banks furnish temptations to over-trading, is the third of the enumerated objections. This must mean, that by affording additional aid to mercantile enterprise, they induce the merchant sometimes to adventure beyond the prudent, or salutary point. But the very statement of the thing shows, that the subject of the charge is an occasional ill, incident to a general good. Credit of every kind, (as a species of which only can bank-lending have the effect'supposed,) must be, in different degrees, charge-
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
14
able with the same inconvenience. It is even applicable to gold and silver, when they abound in circulation. But would it be wise on this account to decry the precious metals; to root out credit j or to prescribe the means' of that enterprise, which is the main spring of trade, and a principal source of national wealth, because it now and then runs into excesses, of which over-trading is one ?
If the abuses of a beneficial thing, are to determine its condemnation, there is scarcely a source of public pros- perity which will not speedily be closed. ' In every case, the evil is to be compared with the good; and in the pre- sent case, sueh a comparison will issue in this, that the
new and increased energies derived to commercial enter- prise, from the aid of banks, are a source of general pro- fit and advantage; which greatly outweigh the partial ills of the over-trading of a few individuals, at particular times, or of numbers in particular conjunctures.
The fourth and fifth charges may be considered toge- ther : These ljelate t6 the aid which is sometimes afford- ed by banks to unskilful adventurers and fraudulent tra- ders. These charges also have some degree of founda- tion | though far less than has been pretended,*and they add to the instances of partial ills, connected with more extensive and overbalancing benefits.
The practice of giving fictitious credit to improper per- sons, is one of those evils which experience, guided by in- terest, speedily corrects. The bank itself is in so much
jeopardy of being a sufferer by it,. that it has the strongest of all inducements to be on its guard. It may not only be injured immediately by the delinquencies of the' per- sons to whom sueh credit is given} but eventually, by the incapacities of others, whom their impositions or fail- ures may have ruined.
Nor is there much danger of a bank's being betrayed into this error from want of information: The directors themselves being for the most part selected from the class of traders, are to be expected to possess individually, an accurate knowledge of the characters and situations of
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
15
those who eome within that description. And they have, in addition to this, the course of dealing of the persons themselves with the bank, to assist their judgment, which is in most cases a good index of the state in which those persons are. The artifices and shifts, which those in desperate or declining circumstances, are obliged to em- ploy to keep up the countenance which the rules of the bank require, and the train of their connexions, are so many prognostics, not difficult to be interpreted, of the fate which awaits them. Hence it not unfrequently hap- pens, that banks are the first to discover the unsoundness of such characters, and by withholding credit, to announce to the public that they are not entitled to i t
If banks, in spite of every precaution, arc sometimes botrayed into giving a false credit to the persons describ- ed ; they more frequently enable honest and industrious men, of small, or perhaps of no capital, to undertake and prosecute business, with advantage to themselves and to the community ; and assist merchants of both capital and credit, who meet with fortuitous and unforeseen shocks, which might, without such helps, prove fatal to them and to others, to make head against their misfortunes, and fi- nally to retrieve their affairs j circumstances which form no inconsiderable encomium on the utility of banks.
But the last, and heaviest eharge, is still to be examin- ed : This, is, that banks tend to banish the gold and silver out of the country.
The force of this objection, rests upon their being aa engine of paper credit, which by furnishing a substitute for the metals, is supposed to promote their exportation. It is an objection, which, if it has any foundation, lies not against banks peculiarly, but against every species of pa-' per credit.
The most common answer given to it is, that the thing supposed is oflittle or no eonseqnenee; that it is immaterial what serves the purpose of money; whether paper, or gold and silver,? that the effect of both upon industry is the same;' and that the intrinsic wealth of a nation is to be
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
16
measured, not by the abundance of the precious metals contained in it, but by the quantity of the productions of its labour and industry.
This answer is not destitute of solidity, though not en- tirely satisfactory. It is certain, that the verification of industry, by a full circulation, with the aid of a. proper and well regulated paper credit, may more than compen- sate for the loss of a part of the gold and silver of a na- tion 5 if the consequence of avoiding that loss, should be a scanty or defective circulation.
But the positive, and permanent increase or decrease of the precious metals in a country, can hardly ever be a matter of indifference. As the commodity taken in lieu of every Other, itis a species of the mosteffective wealth, and as the money of the world, it is of great concern to tjhie state, that it possess a sufficiency of it to face any de- mands which the protection of its external interests may create.
? \:>>-^I^^Xol^fSfeflB<<i>>- seems to admit of another, and a more conclusive answer, which controverts the fact itself. A nation, that has no mines of its own, must derive the pre- cious metals' from others ,? generally speaking,. in ex- change for the products of its labour and industry. The quantity it will possess, ^trill therefore, in the ordinary course . of things, be regulated by the favourable' or un- favourable balance of its trade j that is, by the proportion between its abilities to supply foreigners^and its wants of them; between the amount of its exportation, and that of its importations. Henee the state of its agriculture arid manufactures; the quantity and quality of its labour and industry5 must, in the main, influence and determine, the
increase or decrease of its gold and silver.
If this be true, the inference seems to be, that well con-
stitutedbanks,,favour theincreaseof-thepreciousmetals.
It has been shown, that they augment, in different ways, -
the active capital of a country. This it is, whieh gene- rates employment; which animates and expands labour and industry. Every addition which is made to it, by
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
17
contributing to put in motion a greater quantity of both. , tends to create a greater quantity of the products of both. And by furnishing more materials for exportation, con- duces to a favourable balance of trade, and consequently to the introduction and increase ofgold and silver.
This conclusion appears to be drawn from solid premises: There are, however, objections to be made to it.
It may be said, that as bank paper affords a substitute for specie, it serves to counteract that rigorous necessity for the metals as a medium of circulation, which, in the ease of a wrong balance might restrain, in some degree, their exportation$ and it may be added, that from the same cause, in the same case, it would retard those eco-
nomical and parsimonious reforms in the manner of living, which the scarcity of money is calculated to produce, and which might be necessary to rectify such wrong balance.
There is, perhaps, some truth in both these observa- tions j but they appear to be of a nature rather to form ex- ceptions to the generality of the conclusion, than to over- throw i t The state of things, in which the absolute exi- gencies of circulation can be supposed to resist with any ef- fect the urgent demands for specie which a wrong balance of trade may occasion, presents an extreme ease. And a situation in which a too expensive manner of Hying of a community, compared with its means, can stand in need of a corrective, from distress or necessityj is one whieh perhaps rarely results, but from extraordinary and ad- ventitious causes: such, for example, as a national revo- lution; which unsettles all'the established habits of a people, and inflames the appetite for extravagance, by the illusions of an ideal wealth, engendered by the continual multiplication of a depreciating currency, or some similar cause. . There is good reason to believe, that where the laws are wise and well executed, and the inviolability of property and contracts maintained; the economy of a people will, in the general course of thing*, correspond
with its means.
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
18
The support of industry, is probably in every case* of more consequence towards correcting a wrong balance of trade, than any practicable retrenchments in the expenses of families or individuals; and the stagnation of it would be likely tt> have more effect in prolonging, than any such savings in shortening, its continuance. That stagnation, is a natural consequence of an inadequate medium, which, without the aid of hank circulation, would, in the cases supposed, be severely felt
It also deserves notice* that as the circulation qfa bank is always in a compound ratio to the fund upon which it depends, and to the demand for it 5 and as that fund is it- self affected by the exportation of the metals, there is no danger of its being overstocked, as in the ease of paper issued at the pleasure of tiie government,- or of its pre- venting the consequences of any unfavourable balance from being sufficiently felt to produce the reforms alluded to, as far as circumstances may require aftd admit.
Nothing ewjbe more fellible t than 'the comparisons which have been made between different countries, to il- lustrate the truth of the position under consideration. --- The comparative quantity of gold and silver, in different countries, depends upon an infinite variety of facts and combinations, aU of whieh ought to be known, in order to judge whether tiie existence, or non-existence, of paper currencies, has any share Tto the relative proportions they contain. The mass and value of the productions of the labour and industry of each, compared, with its wants,- the'nature of its establishmenttsabroad 5 the kind of wars in\which it is usually engaged; the relations it bears to theNsountries which are the original possessors of those metals; the privileges it enjoys in their trade j these, and a number of other circumstances, are all to be taken into the account, and render the investigation too complex to justify any reliance on the vague and general surmises, which have been hitherto hazarded on the point.
|n the foregoing discussion, the objection has been cuu- sidered as applying to the permanent expulsion and dhai-
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
19 .
nutioa of the metals. Their temporary exportation, for particular purposes, has not been contemplated: This, it wast be confessed, is facilitated by banks, from the facul- ty banks possess of supplying their place. But their utili-
ty is in nothing more conspicuous, than in these very eases. They enable the government to pay its foreign debts, and to answer -any exigencies which the external concerns of the community may have produced. They enable the merchant to support his credit, (on which the prosperity of trade depends,) when special circumstances prevent re- mittances in other modes. They enable him also to pro- secute' enterprises, which ultimately tend to an augmenta- tion of the species of wealth in question. It is evident, that gold and silver may often be employed in procuring commodities abroad; which, in a circuitous commerce, re- place the original fund, with considerable addition. But it is net to be inferred from this facility given to tempora- ry exportation, that banks, which are so friendly to trade and industry, are in their general tendency inimical to the increase of the precious metals.
These several views of the subject, appear sufficient to impress a full conviction of the utility of banks, and to demonstrate that they are of great importance, not only in relation to the administration of thefinances,but in the general system >>f the political economy. .
- The judgment of many concerning them has, no doubt, "been perplexed by the misinterpretation of appearances, Which were to be ascribed to other causes. The general devastation of personal property, occasioned by the late war, naturally produced on the one hand, a great demand for money; and on the other, a great deficiency of it to answer the demand. Some injudicious laws, which grew out of the public distresses, by impairing confidence, and causing a part of the inadequate sum in the country to be locked up, aggravated the evil: The dissipated habits, contracted by many individuals during the war, which af- ter the peace plunged them into expenses beyond their in-
comes | the number of adventurers without capital, and in
? Digitized for FRASER http://fraser. stlouisfed. org/
Federal Reserve Bank of St. Louis
20
many instances without information, who at that epoch rushed into trade, and were obliged to make any sacrifices to support a transient credit; the employment of considera- ble sums in speculations upon the public debt, which from its unsettled state was incapable of becoming itself a sub- stitute: all these circumstances concurring, necessarily led to usurious borrowing; produced most of the inconve- niences, and were the true cause ofmost of the appearances, which, where banks were established, have been by some erroneously placed to their account: a mistake which they might easily have avoided, by turning their eyes towards places where there were none j and where, nevertheless, the same evils would have been perceived to exist, even in a greater degree than where those institutions had ob-
. tained.
These evils have either ceased, or been greatly mitigated.
Their more complete extinction may be looked for from that additional security to property, which the Constitution of idle United States happily gives j (a circumstance of prodigious moment in the scale, both of public and private prosperity,) from the attraction of foreign capital, under the auspices of that security, to be employed upon objects, and in enterprises, for which the state of this country opens a wide and inviting fieldj from the consistency, and sta- bility, which the public debt is fast acquiring, as well in the public opinion at home and abroad, as in fact; from the augmentation of capital, which that circumstance, and the quarfer-yearly payment of interest will afford j and from the more copious' circulation, which will be likely to be created by a well-constituted national bank.
The establishment of banks in this country, seems to be recommended by reasons of a peculiar nature. Previously to the revolution, circulation was in a great measure carri- ed on by paper emitted by the several local governments. In Pennsylvania alone, the quantity of it was near a million and a half of dollars. This auxiliary may be said to be now at an end.