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Subject Area: Economics
Subject Area: Political Theory

GALLATIN TO WILLIS HALL. - Albert Gallatin, The Writings of Albert Gallatin, vol. 2 [1879]

Edition used:

The Writings of Albert Gallatin, ed. Henry Adams (Philadelphia: J.B. Lippincott, 1879). 3 vols.

Part of: The Writings of Albert Gallatin, 3 vols.

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GALLATIN TO WILLIS HALL.

New York, April 3, 1838.

Sir,—

In my answer of 20th February to your letter of 14th of the same month on the subject of post-notes, I stated the objections to “a law authorizing the banks to issue such notes for a limited time for the purpose of facilitating the resumption of specie payments,” to which object your inquiry was exclusively directed. I am very far from ascribing much weight to my opinion on a subject on which, as I mentioned, I had no practical experience, and on a measure respecting the effect of which we rely only on conjectures. But several respectable and experienced merchants who are anxious for a resumption are so decidedly of opinion that it will be beneficial, that I would not wish to stand on that doubtful point in opposition to them.

There is, however, a view of the subject taken by some which I think to be entirely erroneous. Post-notes cannot and ought not to be used as currency. They cannot be used as such unless the banks agreed on were compelled to take them and pay them as such, which would be equally unjust and injurious. If any paper not exchangeable on demand for gold or silver is received and used as currency, it must necessarily take the place of and drive away the bank-notes payable on demand, and this would be but a pretended resumption of specie payment.

But banks which are weak, and there are some of that description in the city, may, by making some sacrifices, be enabled to borrow money on the credit of such notes, and thus to strengthen themselves and to stand the difficulties of the first months of the resumption. The principal and avowed object of the measure, however, is to enable the banks to extend their discounts and to lessen the pressure on the commercial community which may grow out of the pertinacity of the United States Bank in protracting the suspension. Here a difficulty presents itself. It cannot be expected that the banks would lend gratuitously their credit to merchants; that they should give their post-notes in exchange for discounted notes without some compensation; and yet, unless permitted by a special provision, I do not see how they could charge more than they received without being liable to the charge of usury. They may afford to borrow at five and lend at six per cent., but not both to borrow and to lend at six. And they cannot, without breaking the usury law, by one and the same operation borrow from the same person at five and lend him at six per cent.

If you can by any legislative provision avoid that difficulty, the power to issue post-notes, though still liable to be abused, may probably be usefully applied in the approaching crisis towards relieving our merchants. The amount, however, should be limited in proportion to the capital, and the denomination of the notes should under no consideration be under 100 dollars. I should prefer not under five hundred.

Amongst the difficulties under which we labor we must reckon the weakness of some banks, particularly the Mechanics’, which renders it doubtful whether they may resume with safety to themselves and without again endangering the other banks. You may recollect that the transactions of the Mechanics’ and of the Dry Dock Bank (though the other banks loaned 900,000 dollars to the Mechanics’ and assumed the payment of the notes of Dry Dock) were the immediate cause of the suspension of specie payments, the last drop which made the bucket overflow. I regret extremely on that account that an attempt should be made at this session to revive the Dry Dock. If ultimately sound and solvent, that institution, after the injury it did to the others, may certainly wait till the next session, and after we shall have passed through the ordeal of resumption.

The affair of the Phœnix Bank is another very unfortunate circumstance. Independent of its misdeeds, it is, apparently at least, one of the strongest and best prepared to resume. Without taking into consideration its stockholders, the locking up of its specie, the situation in which its creditors (depositors) will be placed, the derangement it will cause in the affairs of the other banks, are all, at this moment, new impediments thrown in our way. If it can be done, let the decision be left by quo warranto, or some other legal process, to the courts of justice. The power to repeal a charter at the will of the Legislature should be exercised with the greatest discretion. You may by legislative enactments divert capital from one employment to another, and substitute, to a certain extent, credit for capital, but you cannot create capital. If you want more capital, it must be invited from abroad; and you cannot expect that foreign capital will be invested in the stock of institutions that may be annihilated by the simple fiat of a popular assembly. I do not wish myself for the establishment of a large State bank at this moment, because I think that it would cut off any expectation of a national bank of the United States. But the State may ultimately be compelled in self-defence to resort to that measure, and you may rely that such an institution could not compete with the Pennsylvania United States Bank without recurring, as it has done, to foreign credit and foreign capital.

I have the honor to be, with great respect, sir, your obedient servant.