Front Page Titles (by Subject) GALLATIN TO LEONARD MAISON. 1 - The Writings of Albert Gallatin, vol. 2
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GALLATIN TO LEONARD MAISON. 1 - 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 LEONARD MAISON.1
New York, 20th December, 1836.
I had the honor to receive your letter of 10th September last respecting the Restraining Act of the State and the conditions on which it might be repealed. You allowed so much time for the answer that I postponed the consideration of the subject. Subsequently an indisposition, which confined me five weeks, put it out of my power to attend to it, and now I have neither the time nor the strength necessary for a thorough investigation. I pray you to excuse the delay; but the subject is familiar to me, and I feel some confidence in the correctness of the general principles on which are founded the views which I will submit to your consideration.
Permit me, in the first place, to refer to the opinion which I expressed six years ago, and before I was connected with any bank. In the “Considerations on the Currency and Banking System” of the United States, published 1st January, 1831, I said, “The prohibition by private persons, &c., to issue any species of paper that can be put in circulation as money is perfectly proper, and indeed necessary; but that of receiving deposits or discounting notes or bills must have had some special and temporary object in view, and does certainly require revision. Why individuals should not be permitted to deposit their money with whom they please is not understood. The advantages, if not the necessity, of this accommodation (discounting notes by private bankers) are such that it is understood that the law in question is in that respect daily disregarded. The prohibition has no other effect than that of enhancing the premium on the discount.” (Note C, page 95.)
The practical knowledge, since acquired by my connection with a bank, of the business of this city has strengthened the conviction that severe and efficient restrictions are necessary in order to prevent inordinate or insecure issues of paper currency; and that every other ordinary banking transaction should, like other species of trade or commerce, be permitted to every person or association of persons (other than bodies corporate), unrestrained by any provision other than the general laws of the country.
We have, from the general practice in the United States, contracted the habit of considering the issuing of a paper currency as an essential attribute of banking. The opinion is erroneous. Banks and bankers had been in existence long before any paper currency was issued by any private individuals or associations. Till very lately there were on the whole Continent of Europe but two or three incorporated banks which issued bank-notes. Then no private banker or association of persons (other than those few banks) had ever issued any species of paper currency. The right of issuing either a metallic or a paper currency has always been considered on the Continent of Europe as an attribute of sovereignty, and it has but very rarely been delegated even to corporate bodies. Even in the British dominions bank-notes have never been issued by the London bankers, neither by those thus technically called, nor by those houses of general business which carry on banking transactions on the largest scale. The business of exchange and banking has for centuries been carried on throughout the whole European Continent, and in the most important seat of commerce of Great Britain, by capitalists who issued no paper currency.
There will ever be, in every country which adopts or tolerates paper money, an intrinsic difficulty in determining by whom it should be issued and under what limitations and regulations. It is a subject for distinct consideration, and I will for the present confine myself to that to which alone you seem to have called my attention, viz., the repeal of those provisions of the Restraining Act which forbid individuals or associations to keep offices of discount and deposit.
The proper banking business consists not in making currency, but in dealing in existing currency and in credit, or, as both are generally expressed, bankers are money-dealers. They borrow and lend money, discount notes, buy and sell bills of exchange. They are, in all those respects, necessary intermediaries in every commercial country.
Their capital—that which they bring into action—and their credit have a tendency to reduce the rate of interest. They lessen the amount of currency wanted for commercial transactions by increasing the rapidity of its circulation by that concentration of payments and by those exchange operations which, both on the spot and between different places, substitute a transfer or exchange of debts and credits for actual payments and transportation of either specie or paper currency proper. Unlimited competition is as desirable and useful in that as in any other branch of commerce. No satisfactory reason has ever been assigned why dealing in money (setting aside the issuing of bank-notes) should be confined to certain chartered companies to the exclusion of every other person or persons. There is not, to my knowledge, any such legal prohibition either in any other of the United States or in any foreign country. The usury laws, the propriety of which is admitted to be doubtful, but which nevertheless prevail everywhere, apply to every money transaction, and not exclusively to bankers or money-dealers. This is not one of those insulated instances from which it may be unsafe to draw general inferences. Private banking has nowhere been prohibited but in New York, and the absence of such prohibition has nowhere been attended with any sensible inconvenience.
It seems, however, to be apprehended that an unlimited repeal even of that portion only of the Restraining Act which prohibits offices of deposit and discount may be attended with danger. It is suggested that depositors should be specially protected, and it is feared that powerful voluntary associations might obtain a dangerous control over the money market.
Whenever the power of issuing a paper currency is vested in a banking company, and restrictions are laid in order to guard against inordinate or insecure issues, it becomes necessary to take into consideration the amount of deposits as well as that of bank-notes. As the liability of the bank is the same with respect to both, the security of the holders of notes is as much affected by the magnitude of the debt due to depositors as by an excessive issue of paper money. But, if it is necessary to protect the country at large, the note-holders, and specially the more ignorant part of the community, against an excessive, depreciated, or unsafe currency proper, the same reason does not apply to depositors. Whether the deposits (so called) arise from an actual deposit of currency, from a transfer of credit, or from a discounted note or bill, the depositors, that is to say, those who keep an account with a bank, require no special provision in their favor. Their transactions in that respect are altogether voluntary; they almost universally belong to a class quite competent to judge where to place their confidence; the repeal of the law will increase the facility of making a proper selection. Enjoying the benefit of the general laws for the recovery of debts, those who may choose to deposit their money with private bankers, or with any association of persons whatever, require no greater protection in that respect than in reference to any other commercial transaction. The Legislature has probably done all that was proper and necessary on that subject, in providing, by the establishment of savings banks, a safe place of deposit, as it is supposed, for the earnings of the poorer classes.
Provisions, whether requiring the actual payment of a certain capital, limiting its amount, or regulating its application, never have and cannot, I think, be extended to individuals generally, or, if enacted, be properly enforced. Great capitalists will ever have an influence on the money market. No other remedy can be found than in the freest competition. But it may be required that the laws should not encourage any artificial dangerous concentration of capital in the same hands. A concentration of small capitals for the purpose of banking is useful, if not necessary, in a country where there is a great disproportion between the demand for capital and the supply. The capitalists were and still probably are too few in number in the United States not to render it desirable that associations should compete with them. I do not apprehend, if the restraining law should be repealed to the extent above stated, and no other alteration is made in the existing laws, that any voluntary association will be formed with such capital as would render it formidable or dangerous. It does not seem, however, that a limitation in that respect could be attended with any inconvenience. But, if necessary for that purpose, the same reason would operate with equal if not greater force against the creation of any chartered bank with a capital exceeding that generally allowed. An inference drawn from the late Bank of the United States would be irrelevant. If the present derangement and increased rate of premium in our domestic exchanges can in any degree be justly ascribed to the expiration of the charter of that institution, some other reason must be assigned besides its large capital, since this capital, under another sanction, remains unimpaired and actively employed.
It appears to me obvious that the prohibition ought to continue in force with respect to bodies corporate, such only excepted as are or may be expressly authorized by law. Incorporated associations are vested with certain special powers or privileges for certain special purposes, and should always be restricted in the exercise of those powers to the special purposes for which they were respectively granted. It would be preposterous to authorize, by a general law, insurance, railroad, and manufacturing companies, or municipal corporations, to become bankers or to transact any other business than that for which they were incorporated. Indeed, the only reason why they should be excepted in repealing the Restraining Act is because the prohibition is by that Act expressly extended to corporations,—a provision which was unnecessary if, as I think, they were by their charters confined to the business for which they were incorporated.
But some difficulties may arise in regard of voluntary associations other than bodies corporate. May they, for instance, be vested, as the new English joint stock banking companies, with the power of having a common seal, and of suing and being sued in their joint capacity and not as distinct individuals? Shall any special provision be made for the transfer of the shares into which the capital of such associations may be divided, and respecting the responsibility of the stockholders? Shall any alteration be made in the law of limited co-partnerships which may better adapt it to joint stock companies consisting of a great number of stockholders or partners?
To the first query I would not hesitate to answer in the negative. The essential and distinctive character of a corporation is that of being enabled to contract, to sue or be sued, and generally to do, in its corporate capacity and name, all other acts (for the purposes specified in the incorporating law) as natural persons may perform. All the other powers of a corporation are either necessarily derived from that primary character, or incidental and not essential. The right of perpetual succession, or of not being affected by the death of any of the members of the association during its existence, and that of expressing its will by a common seal, its by-laws, or in any other way provided for by the law, are inherent to and necessarily flow from the conversion of an association of persons into an artificial body acting as a natural person might do. The power of purchasing land, the exemption of personal responsibility, and other incidents are not essential characters of a corporation. They may be, and, by our own laws and those of other countries, have been, omitted or modified according to circumstances. The recent Act of Great Britain respecting banking joint stock companies is, as well as any Act of an analogous nature which might be passed by the State of New York, a general act of incorporation, which gives the essential character of a body corporate to every voluntary association formed for the purpose of carrying on banking business. The modifications and conditions annexed to such general act would not divert it from its primary and essential character. A general law of that nature, multiplying indefinitely bodies corporate in fact for the purpose of banking, appears to me in every respect liable to great abuses and highly dangerous. But it is not necessary to dwell on that topic, since such general law is forbidden by the constitution of the State. No law creating a moneyed corporation can be enacted without the assent of two-thirds of the members of both houses of the legislative body. This provision of the constitution has been uniformly construed to mean that a majority of two-thirds was necessary for the creation of each distinct moneyed corporation. It clearly follows that no general law, giving the essential character of a corporate body to every banking voluntary association or joint stock company that would avail itself of the provisions of that general law, can be passed consistent with the constitution.
I think, however, that all the questions, without exception, which may arise respecting any modification whatever in the existing laws of the land, connected with the subject under consideration, and beyond a simple repeal of the Restraining Act in the manner heretofore stated, may be satisfactorily solved by recurring to a general principle.
It is asked that the ordinary and proper banking business (setting aside for the present the question respecting the issuing of bank-notes) should be left as free and open to every person or association of persons as any other branch of commerce whatever, but not that it should be placed on a better or different footing. There is no reason why persons or associations of persons should not be permitted to apply their capital and credit as freely to the dealing in promissory notes and bills of exchange as to the purchase and sale of merchandise, of land, or of any commodity whatever. Nor is there any reason why any special provision should be made in favor of that particular branch. Let, therefore, every person or association of persons, disposed to carry on that business, be permitted to avail themselves without restriction of general laws of the land.
But if any modification of the existing laws (beyond the simple repeal above stated) is suggested, either for the purpose of facilitating banking or in order to guard against any danger apprehended from the repeal, let the propriety of such modification be tested by the general principle, and none be adopted in reference to banking which may not with propriety be applied and which shall not be at the same time extended to every other branch of commerce, and thus become part of the general law of the land.
Should my health and time permit, I will try in a subsequent letter to state the reasons which seem to me imperiously to forbid the repeal of the prohibition to issue bank-notes, and will also submit to you some modifications in the formation of banks and further restrictions on their operations, which appear to me necessary both in order to remove some of the well-founded objections against those institutions, and for the purpose of arresting the progress of excessive or unsafe issues of paper money. Be pleased to state whether any part of what I have written requires further explanation. You are at liberty to make any use you may think proper of this letter.
I have the honor, &c.
GALLATIN TO WILLIS HALL.1
New York, February 20, 1838.
I had the honor to receive on Saturday last your letter of 14th instant, asking my opinion on the question “whether a law authorizing the banks to issue post-notes for a limited time would facilitate the resumption of specie payments?” As, from the time when I became connected with one of the banks of this city, the law forbidding the issue of such notes has always been in force, I have had no opportunity to become practically acquainted with the use or abuse of post-notes. On consulting some of the most intelligent and experienced officers of the banks, and who are also earnestly desirous that specie payments may be resumed and maintained, I found that their opinion coincided with the general view I had taken of the subject. We think that the repeal of the prohibitory law could not in any shape facilitate the resumption of specie payments, and that it would at this time be inexpedient.
Post-notes, in that respect similar to Treasury notes, are a promise to pay at a subsequent day. Their value depends, therefore, on the market price of the use of money, or the true rate of interest at which money may be borrowed. Fluctuating, therefore, in value according to the fluctuations of that price, they never can, from the moment we return to specie payments, be used as currency. The banks could not substitute them for their notes payable on demand. Nothing can then serve as currency but paper bona fide exchangeable on demand for gold or silver. If not used as a substitute for currency, the only way in which post-notes could be supposed to add to the resources of the bank would be as means of borrowing money. But there is no solid bank in good credit that could not borrow as well without as with them. It is not for the purpose of increasing the resources of the banks in order to facilitate the resumption that post-notes are desired and suggested. It is simply in order that the banks may be induced to increase their discounts by an exchange of those notes for the notes offered for discount. This would only increase the liabilities of the banks and render them less able to maintain specie payments. Without reference to specie payments, and apart of the present crisis, post-notes, as a negotiable paper, are often useful to the commercial community. Their legitimate use consists principally in facilitating the transmission of funds to other parts of the United States; and even in that respect bank-notes payable on demand, not to bearer, but to order, or drafts at sight accepted by the banks, would answer the same purpose. But, whatever advantages may be derived by merchants from post-notes fairly and soberly used for such purposes as those or other legitimate operations, we were all of opinion that to repeal at this moment an existing restrictive law, and to authorize the banks to issue a new species of paper payable at a future day, would have a pernicious effect on public opinion, impair the public confidence, on which we must principally rely, and be, therefore, for the present, altogether inexpedient.
The city banks appear now to expect and to be determined to resume specie payments on or before the 10th of May. They are strong, and are pursuing the measures necessary still more to strengthen themselves. If they do not formally declare a day, it is principally because it is thought that, by meeting the other banks in convention on the 11th of April, those of New York will have more weight in inducing those of the East, South, and North-West, which are believed to be well disposed, to resume simultaneously with themselves or at a very early day. The fall in the rate of foreign exchanges, the expected influx of specie, and the still stagnant state of business are highly in their favor. The only difficulty in the way is the apprehended continued determination of the banks of Philadelphia, principally of the United States Bank, to prolong the suspension. Even in that case I do not apprehend positive acts of hostility; but others do.
To guard against that danger I do not perceive that the State can assist the banks otherwise than by interposing its credit, by authorizing, if necessary, the loan to them of a certain amount of State stock. If, as I do believe and hope, the Legislature is determined not to extend the time for resuming, and will let the charters of the banks be forfeited, according to law, on the 10th of May, some evidence of that determination might be useful.
I will shortly send you a correct statement of the city banks, and ask your permission to add some observations on our banking system generally and the improvements of which it appears to me to be susceptible.
I have the honor to be, &c.
[1 ]State Senator, Albany.
[1 ]Chairman of the Committee on Banks, Albany.