Front Page Titles (by Subject) NEW YORK BANK PRESIDENTS TO MICHAEL HOFFMAN. 1 - The Writings of Albert Gallatin, vol. 2
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NEW YORK BANK PRESIDENTS TO MICHAEL HOFFMAN. 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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NEW YORK BANK PRESIDENTS TO MICHAEL HOFFMAN.1
New York, February, 1842.
Mr. Mann has communicated to us your letter to him requesting that he should inquire whether the banks of this city were able and willing to aid by additional loans in extricating the State from its present financial embarrassments.
The banks are so deeply interested in the result; it is so essential to the public welfare, to the commerce of this city, and to their own safety that the credit of the State should be restored and its finances placed on a permanent and secure footing, that there can be no doubt of their disposition to promote those objects to the utmost of their ability. But we are compelled to say that, in our opinion, farther advances on their part to the State would, in their situation and at this time, be highly inexpedient and improper. The comptroller, in his report of the 15th instant, has justly observed that “the commissioners of the canal fund had carried to exhaustion the questionable expedient of temporary loans from banks.” Believing that the great object we have all in view may be attained without recurring to that expedient, we beg leave to state somewhat at large the reasons on which our opinions are founded.
The primary duty of banks is to maintain specie payments. How this has been performed by the banks of this city and of the State is well known. They resumed alone in 1838; the resumption which ensued in other States was due to their example and influence; and they have maintained their position notwithstanding the suspensions which have since occurred.
This city is almost universally a creditor place, with respect to the country and to the other States, and has therefore little to fear from the situation or action of any other part of the Union. But, though safe in that respect, it has become the centre of all the moneyed operations of the country, and the point where almost all the balances between the United States and foreign countries are ultimately settled. The city banks must therefore always be ready to meet every extraordinary demand for specie growing out of an unfavorable rate of foreign exchanges. For that reason, seeking much more for safety than for profit, they have reduced their circulation and their discounts within very narrow limits. Yet such was the effect of the enhanced rate of foreign bills during the last summer and autumn that the specie which, in the seventeen safety fund and the three free banks of the city, amounted, on the 1st of July, 1841, to $6,082,884, was, on the 1st of January, 1842, reduced to $3,688,806; being a diminution in six months of $2,394,078, or near two-fifths. We cannot give the precise comparative statement for the four other chartered banks (Manhattan, Fulton, North River, and Chemical), but we know that the diminution was in about the same proportion. The consequence was a corresponding lessening of loans and discounts, which, together with the stocks and all other items in their possession bearing an interest, did, on the 1st of January last, amount to less than 40 per cent. beyond their capital.
It is obvious that the banks have no other means to arrest the drain of specie than the curtailment of their discounts. State stocks owned by them prove a valuable resource only when they can be readily disposed of. The process of curtailing, inconvenient and even harsh as it may be, is the only remedy, and which cannot be applied with effect except to short business paper. The banks could not make further advances to the State without curtailing the discounts of such paper, already much reduced; and, in case of a renewed unfavorable rate of foreign exchanges, the pressure on the commercial community might prove too severe to be passively borne.
We may appeal to experience to prove the danger of extraordinary demands on the part of governments on banks. The lamentable state of those of Philadelphia is principally due to the fatal influence of the late United States Bank of Pennsylvania. But the evil has been greatly aggravated by the forced loans extorted year after year by the State, the result of which has been not less disastrous to the State itself than to the banks. In analyzing the causes of the general suspensions in the United States of 1814 and 1837, and of that of the Bank of England in 1797, it will be found that the action of government upon the banks was, though in different degrees, in some instances the primary, in other the immediate, cause of the suspensions.
We will now submit to your consideration the reasons which induce us to believe that the finances of the State may be placed on a safe permanent footing, and its present temporary embarrassments be removed, without recurring to the banks for any direct assistance.
The 6 per cent. stock of the State was at par in the beginning of June last; and the comptroller might probably have obtained at that rate the money he wanted for the service of the year. The principal causes of the subsequent depression have been the pressure on the money market caused by the unfavorable rate of foreign exchanges; the irregular manner in which new issues of 6 per cent. stock of the Erie Railroad have time after time been thrown into the market; the dishonest voluntary repudiation of State debts, avowed in some quarters and not sufficiently discountenanced in others; above all, the apprehension of a continued and indefinite increase of the State debt. The remedy will be found, first, in making efficient provision for the payment of the interest and for the extinguishment of the principal of the existing debt, including the loan which may be absolutely necessary for the service of the year and for the payment of the floating debt; secondly, in a guarantee that no further debt shall be incurred without providing at the same time adequate resources for the payment of both principal and interest within a short period.
The public accounts are too complex to enable us to make a correct statement of the resources and liabilities of the State. Yet we will be better understood by resorting to figures, and you may easily correct our errors in that respect. We will only try to err on the safe side, and you will perceive that those errors cannot affect the argument.
We assume that the legitimate resources of the general fund are sufficient to meet the current expenses of government, including the interest on the stock charged to it in the public accounts, and amounting to $1,255,193.
According to your statement, confirmed by the communication of the comptroller to the Legislature, of the 15th February, a loan of $3,000,000 will be sufficient to pay the temporary loans, the debts due to contractors, and (including the Chemung locks) to complete all the repairs necessary to put the canals in operation at the beginning of the season.
It appears, therefore, to us that the only provision to be made must be in reference to the punctual payment of interest on the debt and its final extinguishment within the period contemplated by law, keeping in view the obligation to reimburse about 5,000,000 of the principal in 1845 and 1846.
The interest is estimated as follows:
Which last-mentioned sum is more than 42 per cent. beyond the interest, amounting, as per above, to $1,314,604. An annual appropriation of 33⅓ per cent., in addition to the interest payable on a 6 per cent. stock, is sufficient to extinguish the principal in twenty-two years and a half; and the old 6 per cent. domestic debt of the United States was actually paid off in that manner. The above-mentioned resources are therefore sufficient to pay within the period fixed by law the whole debt, including the $1,255,193 now charged to the general fund, even if the State was ultimately obliged to pay the $1,200,000 loaned to three companies, which have been deducted in the above estimate.
It is true that the difference between the resources and the annual interest will produce little more than two millions before the end of the year 1845, when $4,370,000 of the principal of the debt becomes due. The residue ought to be paid out of the existing available balance of moneys in the hands of the commissioners of the canal fund. The nominal amount of that balance was on the 1st October last $3,157,264, to which should be added four years’ interest on the same from that date to the 30th September, 1845. But it is stated in the last communication of the comptroller that more than $500,000, part of that balance, had been loaned to banks which have suspended, and a further portion of the same balance consists of $917,385 loaned to the Treasury for the United States deposit fund. It appears, therefore, that there will be a deficiency which must be provided for out of the said deposit fund. It is also believed that if a small loan should be necessary in 1845, in order to complete the payment of the debt then becoming due, it will be obtained on advantageous terms, inasmuch as the credit of the State will then have been restored, in consequence of the provisions now contemplated.
It is evident that those provisions must be of the following character, to wit:
1st. A tax of one mill on the assessed property of the people of the State.
2d. An Act by which the following funds shall be and remain exclusively pledged for the payment of interest and principal of the whole debt due or guaranteed by the State, and including the loan of three millions intended to be authorized at this time, till the final reimbursement and extinction of the said debt; that is to say, 1st, the proceeds of the one mill tax aforesaid; 2dly, the balance of moneys now remaining in the hands of the commissioners of the canal fund, together with the interest which may hereafter accrue on the same balance; 3dly, the net proceeds of the tolls on all the State canals, after deducting therefrom the amount expended for salaries, repairs, and charges on the said canals, but not including amongst such charges and repairs those that may be incurred for the enlargement of the Erie Canal, or for any other new works, and also the annual contribution of $200,000 to the general fund.
Provided, that whenever the annual amount of the said funds shall, after the reimbursement of the loans contracted for the construction of the Erie and Champlain Canals, and of the Chenango Canal, as also of the three million loan now to be authorized, exceed the sum of $1,869,000, the surplus may be applied to such other purposes as the Legislature may direct, or the amount of the one mill tax may be proportionably reduced.
It is to a provision of this nature that we wish particularly to call your attention. We repeat that we do not pretend to have made a correct statement in all its details of the resources, liabilities, and temporary embarrassments of the State, and that we have attempted an estimate only by way of illustration. The general principles of the contemplated provisions are alone essential. We will only observe that if we have underrated the immediate wants of government, it seems to us that it would be safer to add another half-mill to the tax than either to increase the amount of the proposed three million loan, or to be compelled again to recur to temporary loans or questionable expedients.
The contemplated proposition makes efficient provision for the payment of interest and reimbursement of principal of the whole debt out of the existing resources of the State, and independent of any contingent increase either of the canal tolls or of those general resources. And it affords, short of an amendment of the constitution, the best possible guarantee against an increase of the public debt. For, since the proposition embraces the proceeds of all the existing available funds of the State, it will be impossible to raise new loans without providing new resources for the payment of interest and principal.
On the other hand, should the sanguine expectations of a great and rapid increase of the canal tolls, which have been heretofore entertained, be realized, the annual surplus, which, according to the estimate of the late canal commissioners, would, in the year 1846, exceed $700,000, will, by the proviso, be at the disposal of the Legislature. It is perfectly clear that all the available resources of the State will, till that year, be wanted in order to meet the payment of the large amount due in 1845. It is equally evident to us that no loans can be obtained on reasonable terms until the credit of the State shall have been restored, and that this cannot be otherwise effected than by an ample and effective provision for the reduction of the existing debt, and by opposing a barrier against any subsequent increase not accompanied by actual instead of prospective additional resources for the payment of both principal and interest.
We have estimated the interest on the proposed three million loan at 7 per cent. When the object to be attained is nothing less than the restoration of the credit of the State and placing its finances on a safe and permanent footing, the difference of $30,000 a year for six or seven years appears to us to be a consideration of subordinate importance. It is unfortunate that the State should be obliged to borrow at a time of general pressure, and when the market price of its stocks is so much depressed. But every State must, when it wants money, pay for it according to that price. In this instance the State will have to compete with the corporation of this city, which has opened a loan at the rate of seven per cent. on account of its water-works. The loans wanted by the general government, if thrown on this market, will also have an unfavorable effect on the rate of interest and the price of stocks. No considerable amount can be loaned either to the general or State government, by either the banks or individuals of this city, that will not cause a pressure upon its commercial interest. All this proves not only that the loan will, at all events, be inconvenient and should be reduced to the smallest possible amount, but also that any attempt to raise it at a lower rate of interest than consists with the actual price of stocks will fail. On the contrary, the issue of a stock which may hereafter be disposed of at par may perhaps induce some of the banks to take it in exchange of their temporary loans.
The actual price of the State five per cent. stock, redeemable in 1855 to 1860, is now 77 per cent., which is nearly equivalent to a seven per cent. stock redeemable in seven years. Whether it be preferable to sell at a discount a six per cent. stock, or to borrow at par at the rate of seven, may be a debatable question, to be decided according to the market price of each. It seems to us that when for a short term of years, the preference should be given to the seven per cent. stock, the premium for which is paid gradually in the shape of annual interest. Upon the whole, it is believed that the officer whose duty it shall be to negotiate the loan may be safely trusted with discretionary power in that respect.
Believing the present to be a most important crisis in the affairs of this State and of the Union, we trust that it will be met with firmness, and that the Legislature will adopt those efficient measures which, by restoring the credit of the State, will promote the interests and secure the welfare of every class of its inhabitants.
[1 ]Chairman of the Committee of Ways and Means of the New York Assembly.