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Subject Area: Economics
Subject Area: Political Theory

GALLATIN TO J. ABBOT, Jr. - 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 J. ABBOT, Jr.

New York, October 14, 1841.

Sir,—

I had the honor to receive your letter asking my opinion on the propriety and effects of a resumption of specie payments by the banks of West New Jersey.

Banks have been permitted to issue paper money on the express condition that they should sustain its value at par with specie. Whenever the condition ceases to be performed, the privilege should likewise cease to exist. If that natural principle was rigidly adhered to, if the banks were expressly forbidden to issue the notes of any suspended bank (including, of course, their own notes when they had themselves suspended specie payments), this alone would in most cases prevent a suspension; and when it did not, the provision must necessarily enable the suspended bank or banks, if solvent, to resume specie payments within a very short time. A much greater indulgence has been granted to banks—much greater, certainly, in this instance—than was necessary. But it is not the less an obvious moral and legal duty on their part, in the case of a general suspension, to resume as soon as possible. On that subject, as well as on the intolerable evils and immoral tendency of a depreciated currency, I have nothing to add to what I have already published on several occasions before, during, and since the suspension in this city, and I beg leave to refer you to my last Essay and Appendix (particularly, Essay, pages 20-24 and 59-62; Appendix, pages 101-114).

If a sense of justice be not a sufficient motive, it seems to me that their interest should induce the banks to perform their duty. The patience of the people is nearly exhausted. They have waited from time to time, always expecting the promised restoration of a sound currency. They now see that nothing has been done in that respect by the change of Administration, that nothing can be expected from it. The opposition to banks, strengthened by the catastrophe of the United States Bank, and by numerous other failures and defalcations, is daily gaining ground, and its effect on the banking system generally and indiscriminately cannot be otherwise averted than by a speedy restoration of the currency. I would indeed myself prefer a total exclusion of paper money to a continuance of that system as now organized and administered west and south of New York.

In order to be able to resume specie payments, the banks which have suspended must have made the necessary preparations. It is not a matter of opinion, but a mathematical truth, that this can be effected in no other manner than by a diminution of the liabilities of the banks and a corresponding curtailing of its own loans and discounts. This last measure is always inconvenient to the borrowers, who call it an injury to the community. The continued suspension of specie payments and circulation of a depreciated currency are the general evil and the true injury to the community at large. The reduction in the amount of discounts is a partial evil which falls precisely on those who ought to bear it, since it was the excess of the loans which was the cause of the suspension. Two years have elapsed since this took place for the second time. If any of the suspended banks have not, during a period so amply sufficient for the purpose, gradually lessened their discounts and their liabilities, so as to be prepared for an immediate resumption, it is their own fault; and it is far better that some of them should, if necessary, wind up their business rather than that those which are sound and prepared should continue to suspend their payments, and that the whole community should still be afflicted with a spurious currency, and that the general interest should still be sacrificed for the benefit of the few. The interest of those borrowers who oppose a resumption may be combined with that of some of the banks, either on account of their own embarrassment, as was the case with the United States Bank of Pennsylvania, or because they make larger profits so long as they are not compelled to curtail their discounts. In either case, plausible pretences for further delay are never wanted; and of this we had sufficient evidence prior to the resumption of specie payments by the banks of this city.

It is notorious, 1st, that they did resume, not only without waiting for the co-operation of the other banks, but notwithstanding the various reasons or pretences alleged in opposition to that measure, all which were founded on its presumed impracticability, or on the pretended general distress which it would cause; 2dly, that the resumption was effected with great ease, and without being attended with any of the fatal consequences which had been predicted; 3dly, that within less than three months the example was generally followed by all the banks of the United States; 4thly, that the subsequent suspensions were caused, exclusively in all but some of the South-Western States, by the inconceivable and unparalleled mismanagement of the United States Bank of Pennsylvania.

As far as I am able to judge, the reasons now alleged for a continued suspension, which are drawn from the supposed inconveniences of a partial resumption, are as unfounded as those which were adduced for this same purpose in 1838. I cannot, for instance, perceive how the fact that the produce of West New Jersey is mostly sold in Philadelphia and paid for in Philadelphia currency can, if your banks should resume before Philadelphia, prove more injurious to the producer and to the country than it now is. The price obtained for the produce, that given for the goods purchased in return, or the amount of debt payable in Philadelphia extinguished with the proceeds, will remain precisely the same.

But the plea of expediency, whether well founded or frivolous, is utterly inadmissible when the question is one, not of profit and loss, but of justice. I cannot see any substantial difference between an attempt to prove that the deteriorated specie currency issued by a coiner is a public benefit and the assertion that the suppression of a depreciated paper currency is a public injury. Repudiating, therefore, every objection to a resumption founded on presumed convenience or expediency, the fact remains to be ascertained, whether the sound banks of West New Jersey have generally made such preparations as will enable them at this time to resume and to maintain specie payments. Of this you are the only competent judges. With their actual situation I am unacquainted, and can at most only point out in a general way the obstacles which, if they have not been foreseen, might defeat the attempt.

There are always, in resuming specie payments after a protracted suspension, difficulties to be encountered, which vary in different places and at different times. In the intercourse between two countries, or two districts of the same country, that which is possessed of the greatest circulating capital will generally be creditor of the other. The city of New York, partly on that account, and also from its having become the principal centre of the commerce and money transactions of the United States, is generally creditor in reference to all the other sections of the country; but, for the same reasons, the United States are generally indebted to Europe, and New York is the place where that debt is concentrated and must be provided for. On that account it would have been very difficult for the banks of New York to resume so long as the foreign exchanges were unfavorable, and they must always be prepared for such a contingency. At this moment there is a continued exportation of specie from this port to Europe amounting to 4 or 500,000 dollars a week, and which, in the opinion of men of business, may continue six weeks longer. As yet it has not affected our banks, the specie wanted having been supplied by an influx from various parts of the country. It must be admitted that this drain, whilst it continues, renders the general resumption somewhat more difficult; but the portion which you might be called on to supply would be so small that, so far as you are concerned, it can hardly be considered as an impediment.

West New Jersey is, however, in the natural course of trade, generally indebted to Philadelphia; and if, as a necessary preliminary to a resumption, the portion of that debt which is payable, not in Philadelphia, but in New Jersey, has not been considerably diminished, money-dealers may, if you resume before Philadelphia, compel your merchants to pay that portion in specie. This might render it necessary for your banks to be better provided than would otherwise be requisite; and it seems to me that this is the only special difficulty growing out of your commercial connection with Philadelphia which you have to encounter.

I take it for granted that your banks have preserved the public confidence at home, and will be supported by the community so far as to be in no danger of a sudden run whenever you resume. It was the total loss of public confidence by the United States Bank of Pennsylvania which caused the failure of the attempt to resume in January last. There would have been no difficulty had the other banks of Philadelphia resumed alone, without making the vain attempt to sustain that bankrupt institution.

I hesitated whether I would answer your letter, partly because I had not the information necessary to form a correct opinion of the immediate practicability, which, in my view of the subject, is the only question open to discussion, partly because neither this city nor perhaps the country at large can be materially affected by the course you may pursue, and I had no wish or business to meddle with the local concerns of another State. Yet, though the evils of a protracted suspension on your part may fall almost exclusively upon yourselves, I am fully sensible of the moral effect which your resuming, without waiting for the action of the adjacent State, may have on public opinion there and in other quarters.

There appears to be increasing disposition in Philadelphia and New Orleans towards an early resumption, and I cherish the hope that it will be found practicable in both places. That event would in its consequences be decisive and restore the currency almost universally.

My last essay, published in June, consists principally of an inquiry into the means by which a recurrence of the evil may be prevented. I have requested the publishers to send you six copies, to be distributed as you may think proper, and I will thank you to let me know whether you have received them.

I have, &c.