Front Page Titles (by Subject) GALLATIN TO N. BIDDLE. - The Writings of Albert Gallatin, vol. 2
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GALLATIN TO N. BIDDLE. - Albert Gallatin, The Writings of Albert Gallatin, vol. 2 
The Writings of Albert Gallatin, ed. Henry Adams (Philadelphia: J.B. Lippincott, 1879). 3 vols.
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GALLATIN TO N. BIDDLE.
New York, 14th August, 1830.
Your answers to my several inquiries have in most instances corroborated my previous opinions, and on several points thrown new light and indeed opened new views of the subject. There is but one of any importance on which I apprehend that we do not altogether agree. I think that you are too sanguine in your expectation of the ability of the Bank of the United States to sustain, under the pressure of any very difficult crisis, specie payments throughout the United States. You have managed the affairs of that institution with so much ability and success that the error, if it is one, is very natural. My own opinion is that, in the use of any paper currency, what we gain in the cheapness of the instrument we lose in security, and that, in order to combine the undeniable utility of paper with real security under adverse as well as favorable circumstances, there is no other remedy than a permanent increase of the circulating metallic currency and a corresponding diminution of the paper. And for that purpose the most simple and efficient mode is the suppression of notes of inferior denomination. To this the government of Great Britain has gradually been led by experience, and it has persevered against a most powerful opposition on the part of the country banks and all their ramifications. The result is that, on a circulation of about 58 millions sterling, they have about 28 millions in bank-notes, 22 in gold, and 8 in silver. They must necessarily give up their indefensible silver currency and substitute one corresponding with its intrinsic value, and time may suggest further improvements. With us, it seems from a first rough estimate that our currency is less than 90 millions of dollars, of which about 60 in bank-notes, 20 in silver in the vaults of the banks (but this portion is not in fact a part of the circulation, which, if the estimate is correct, amounts actually to only 70 millions), and less than 10 in silver circulating amongst the community. You very justly observe that, if the Bank of the United States was to withdraw its 5-dollar notes, the deficiency would be filled, not by gold, but by the notes of other banks,—an objection which Congress may not have the will, but has the undeniable constitutional power, to obviate by the imposition of a stamp duty. But permit me to remark that, however analogous in other respects, there is in this point of view a most essential difference between United States $5 and British £5 notes, since the admission of the first excludes, whilst the suppression of all those under £5 brings in the circulation gold coins or an equal value in silver, according to the mint regulations and circumstances of the country. You will at once perceive why I have been anxious that gold, by being rated at our mint at nearly its real value, might become part of the circulating medium; and that, whilst allowing even in prosperous times the necessity of the Bank of the United States to maintain a sound currency, I would wish, if practicable, such further restrictions on the issue of paper generally as would enable that institution at all times and under any direction to perform that office, and to afford complete security against the recurrence of a baneful and demoralizing inconvertible paper currency. The most skilfully administered bank can only be prepared to meet ordinary commercial fluctuations. But when a real and severe crisis occurs, you are perfectly aware that moral causes may increase the pressure to an extent which will baffle every calculation, for the very reason that those causes are beyond the reach of calculation. On the other hand, the example of France, under the united pressure of a double invasion, a failure of crops, large indemnities to foreign countries,—a vast portion of which was paid by the exportation of specie,—an unsettled government, and wild stock speculations, is decisive to prove with what facility a crisis is met with an abundant circulating metallic currency. We were, Mr. Baring and myself, spectators of the crisis, of which I could only see the external appearances and results, whilst he was behind the scenes and deeply interested in the event. We conferred often on the subject, and came to the same conclusions. He has ever since been an advocate in England of the simultaneous use of the two metals for the sole purpose of enlarging the basis of the metallic currency; and I beg leave to refer to his evidence before the House of Lords in March, 1819, particularly in reference to the fact that the Bank of France, in a situation nearly as critical as that of the Bank of England in February, 1797,1 was preserved by the supply afforded “through all the various small channels of circulation” of a country “every part of the circulation of which is saturated with specie.” As far as I can yet judge, the amount of the State banks’ notes now in circulation does not materially differ from what it was in 1819, whilst yours have increased from less than 3½ to near 18 millions. That increase is no more than what was wanted, that is to say, from about 45 to 60 millions, which corresponds with our increase of population; and in a country which is not in a retrograde situation the mass of exchanges and sales of commodities will, and the currency, all other things being equal, should, increase nearly in the same ratio as the population. Viewing, therefore, the currency not partially, but as a whole, your circulation has rather checked the increase than taken the place of the notes of the State banks, operating of course both ways where those banks were quite rotten. But we must expect that a corresponding gradual increase of currency will be wanted, amounting, at the same ratio, to 20 millions additional at the end of the next ten years. Now your circulation is already in the ratio of more than 50 per cent. to the amount of your capital, which exceeds the ratio not only of the Massachusetts, Rhode Island, and good city banks, but that of all the State banks taken together, this not being much above 40 per cent. Though probably practicable, and not inconsistent with the generally admitted banking principles, would it be prudent to increase your circulation much beyond its present amount? Keeping always in view ultimate security and the possibility of an extraordinary crisis, would it not be a safer course, if practicable, to supply that gradual want of an addition to the existing currency by an enlargement of the metallic currency, rather than by an increase of notes of any description?
Deeply impressed with what I consider a fundamental principle, I must necessarily advert to it whenever I treat the subject. But it does not follow that it would be proper to present it precisely in the same manner as when addressing you in confidence. The first duty is to preserve the anchor of safety to which we are now moored; and in every plan of reform it is but common wisdom to propose only that which there is a chance to obtain. Yet, and although I have heretofore always abstained from any allusion to the constitutional powers of Congress in reference to State banks, I do not know whether it may not now be proper to act on the offensive. The suggestion of a stamp duty, the animadversions on the guarantee of banknotes by a State, and thorough exposure of the country banking system, are all of that character. How far and where it may be prudent to conciliate or necessary to attack I have not sufficiently examined, and must remain for the moment subject to further consideration. But I wish to call your early attention to the imminent danger there is that the renewal of the charter may not be obtained on any terms, and to the absolute necessity of the sacrifices which will, at all events, be requisite in order to succeed.
In 1810 the weight of the Administration was in favor of a renewal, Mr. Madison having made his opinion known that he considered the question as settled by precedent, and myself an open and strenuous advocate. We had the powerful support of Mr. Crawford in the Senate, and no formidable opponent in either House but Mr. Clay, a majority of political friends in both Houses, and almost all the Federal votes on that question, with no other untoward circumstance but the personal opposition to Mr. Madison or myself of the Clintons, the Maryland Smiths, Leib, and Giles; the banking system had not yet penetrated through the country, extending its ramifications through every hamlet, and the opposition due to the jealousy or selfishness of rival institutions was confined to a few cities; yet the question was lost. Now opposition arising from interested motives pervades the whole country; in this State, for instance, amidst the unintelligible commixture and distinction of parties, the country banking interest is all-powerful on all questions connected with that subject; with a sect of politicians throughout the Union “State rights” has become a watchword; worst of all, the President has prematurely and gratuitously declared himself and given the signal of attack to his adherents; and all these, with the exception of a few friends of Mr. Calhoun, are ready to obey. I believe that all the three enlightened members of Congress for this city are of the number. The result of my personal observations last winter at Washington was unfavorable; even Mr. Ingham, a friend to the institution, seemed to me to despair, and Mr. Van Buren’s safety fund is at least a proof that his views of the banking system are not correct. Against all this we have only the experimental knowledge of what would be the result of uncontrolled State banks; and, taking in consideration all the circumstances of the case, I am clearly of opinion that, if the charter is renewed, it will not be on such terms as the bank might wish, but on the conditions which Congress may be pleased to impose, and which the bank will be compelled to accept. It was a mistake on the part of the agent of the former bank, Mr. Hollingsworth, to believe, when the discussion took place, that he could treat with Congress on equal terms. And I may add that the high dividends, extensive circulation, and flourishing situation of the bank will afford additional motives or arguments for imposing harder conditions. One of the most obvious arguments will be derived from the practice adopted by the States to tax their banks. If Massachusetts imposes one, and New York, including the safety fund, more than one, per cent. annually on the capital, why should the Bank of the United States, enjoying greater advantages, be exempted? I do believe a tax to that amount, or an equivalent, to be the minimum which will be required; and if the bank can, when paying no tax, divide 7 per cent., it will be clearly its interest to submit to the condition rather than to dissolve itself.
It must, indeed, be acknowledged that, independent of the value of the privilege to trade without incurring any greater risk than the amount of capital paid in, and setting aside the advantages derived from private and public deposits, there is a solid foundation for the claim on the part of the public to participate at least in the profits derived from the issues of a paper currency. No change may be said to be produced that affects the community by the substitution of convertible and not depreciated paper to gold and silver. In both cases the community loses (each individual in proportion to his share of it) the interest on the total amount of the circulation, and may be considered as paying an annual tax to that amount (which, being received, in the case of a metallic currency, by nobody, is a dead loss to the country); and as, in the case of such non-depreciated paper currency, the amount of the whole currency in circulation cannot be materially increased, the tax remains the same. But in this case the proceeds of that tax, or at least a considerable portion, instead of being lost to everybody, are actually received by those who have the privilege of issuing the paper; and this is in fact the principal advantage arising from the substitution of paper for gold and silver, a privilege in which there is a common, universal feeling, founded, as I think, in justice, that the community or the government has a right to participate. To what amount must be investigated; but I would think it consistent with the soundest policy at once to acknowledge the justice of the claim, and that an equivalent must be given for it. One of the advantages is that of meeting the argument that government has a right and ought to issue the paper. Admitting the principle, you have only to show that not only the object is attained in a cheaper, safer, and more efficient manner through the instrumentality of the bank, but that, in reality, government may through it also receive without risk or trouble as much profit as if issuing itself the paper.
Whether a direct tax on capital or dividends, or an equivalent by a moderate interest on public deposits, a participation in the dividends when exceeding a certain rate, or some other mode, would be preferable, should be subjects of early consideration, in order that the public mind may be prepared before the day of Congressional discussion. What I would prefer, as conferring more real benefit to the community than any payment in money, would be a reduction from 6 to 5 per cent. in the rate at which bills are discounted; but this may not be practicable; and banking left to private individuals has certainly that advantage over our system, that the rate at which they lend, varying with circumstances, always adapts itself to the state of commerce and of the money market. Here, and on the plan of an inflexible rate of discounting bills, when there is less demand for capital, banks must either lay on their oars, as your branch did at Boston at the time you mentioned, or discount doubtful paper; and when the demand becomes great they must reject good paper, or discount more than prudence would dictate. The private banker in London and everywhere on the Continent of Europe discounts, according to the plenty or scarcity of money (as it is called), at the rate of 3 or as high as 8 per cent. I have seen instances of both cases, the usury laws in the last being evaded by purchasing accommodation bills of exchange, instead of discounting notes; but this is a digression. When I alluded to the transactions in bills of exchange as perhaps affording means to give a popular equivalent, you will, I am persuaded, do me the justice to believe that I was quite aware that the principle was wrong, since it would only be transferring the legitimate profits of those operations from those who transacted them to another class of individuals who had not the slightest claim to them. And as relates to government, there is no branch of the business of which it has less reason to complain, its own part of it being done gratuituously, which is tantamount to a participation in the profits. Under whatever forms effected, the gratuitous transmission of the public moneys cannot be considered but as a purchase at par of Treasury drafts by the bank, or of bank drafts by the Treasury, to any amount, at any time, and from and on any places which may suit the convenience of the Treasury, without regard to that of the bank, or to the state of the market. (A comparative view of the amount thus transmitted for a longer period than that annexed to Mr. McDuffie’s report, and of the inland exchange purchased by the bank, which I already have, might be useful; but you have not given me a corresponding statement of the drafts sold by the bank and offices on each other and of the profits thereon.) I was therefore induced to suggest the subject: 1st, because the analogous provision of making the bank and branches’ notes payable everywhere is and always was the most popular measure within my knowledge which could be adopted, although I have always shown to the many country gentlemen who asked for it that, as an obligation, it was impossible to require it; 2d, because, having requested the President to explain to me what he meant by his assertion that the bank had failed in establishing an uniform currency, I understood his allusion to have been either to the bank and branches not receiving always other branches’ notes as cash, or to their not purchasing individual bills or selling their own drafts at par. I rather think that their refusing thus to give drafts at par was what he particularly complained of; and I attempted, though without much success, to show that par of exchange and uniform currency were two very distinct things. Now, if you reflect on the time when your charter expires, you will perceive that it may become necessary, by some modification and sacrifice, to remove that objection, however unfounded it may appear to both of us.
I have thought it useful to call your attention to those two important points, viz., the propriety of enlarging the circulating metallic currency, and the necessity of being prepared for such modifications of the charter as will give to the government a greater participation in the profits of the bank and render it in some respects more popular. There is a third point on which I do not feel myself sufficiently informed: it is the real utility of country banks to the districts in which they are situated. I have only general and vague notions on that subject. That the local currencies they issue are anomalous and insecure I am satisfied; but independent of the selfish motives of speculators in those institutions, there is a general feeling even now in their favor, which must have its foundation in some real utility. It is fully admitted that in Scotland, and strongly asserted that in England, they have contributed to promote industry and the general prosperity. To distinguish in that case between use and abuse is important, and to me difficult. It would be equally unjust and bad policy to deny, indeed, not to state, the real advantages which, under proper restraints, may attend those banks even in districts almost purely agricultural. As far as applied, and in proportion to the commercial transactions in country produce, manufactures, &c., of the district, there is no intrinsic difficulty. This seems to me to lie in the question, whether and how far bank loans may be safely made to mere farmers on the security of their real estate. The Scotch banks do it constantly. But can a line be drawn founded on any principle? To state those with sufficient precision, in a way which may indeed show where the abuse lies, would be candid and conciliatory; and I will thank you if you can assist me in that respect, either from your own knowledge or by referring me to others, or even to any work worth consulting.
I have received the returns of the cashiers from which the general statement of banks was prepared, but have as yet only given them a cursory examination. The charter of the State Bank of Alabama is in point; we want that of the State Bank of South Carolina and Tennessee. Of the last there is only an extract in your Nashville cashier’s letter, which is not sufficiently intelligible. (He says also that he has forwarded to Mr. McIlvain a report of the bank committee at the last session of the Legislature, showing the situation of the bank, which has been very loosely managed; and this report is not amongst the papers forwarded to me.) The State of South Carolina is stated in a note to be the sole owner of the bank of that name; the charter should therefore be examined.
Since writing this, I have read the printed “Reports of the Banks of Georgia,” transmitted by you to me as above. There is no doubt that the Central Bank of that State is only an annex of the Treasury. Copy of its charter is wanted. This becomes very serious; four States erecting their Treasury into banks in whose names they emit bills of credit. Have the goodness to extend the inquiry as to that point to Louisiana, Mississippi, and North Carolina.
I am going for health and relaxation to Newport, and may be absent a fortnight. On my return I will again address you. You need not in the mean while write to me.
I have the honor, &c.
15th. Mr. Hopkinson called on me last night. Being on the eve of leaving the city, I could not avail myself of your kind offer. Should I want assistance hereafter, I will let you know. I think that I will not, with respect at least to documents. I must examine them myself; the extracts I may want will not require much transcribing, and I may have the occasional assistance of my sons.
[1 ]Its ordinary circulation is 9½ to 10 millions sterling, the specie about half that sum, discounts 10 millions, capital above 2½ millions, deposits under 2½. In November, 1818, the circulation being about 9½ millions, the specie was reduced to about 1,300,000. In 1797, when the Bank of England suspended specie payments, its specie was 1,270,000; its circulation 8,640,000; deposits 3,370,000.