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Subject Area: Political Theory

GALLATIN TO JOHN A. DIX, Albany. - 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 JOHN A. DIX, Albany.

New York, 30th March, 1842.

Sir,—

I have been requested by gentlemen connected with the banks of this city to write to you on the subject of a bill before the Senate calling on the safety fund banks to make further or greater payments than was provided by the Act which created that fund.

It is not my intention to discuss the legal or constitutional power of the Legislature to pass an Act in conformity with the proposition now before them. It is sufficient to observe that the constitutional power does not imply the moral right of enacting a law, and that such power does not release a Legislature from their moral duties. I will accordingly examine the question only in reference to its justice and expediency.

The object of the bill is to replenish the safety fund promptly, that is to say, by further means than the annual payment of one-half per cent. on their capital, the condition on which charters were granted by the Legislature and accepted by the banks. Not having seen the bill, I do not know to what extent the additional payment is to be carried, either as to amount or time. But, whatever the extent may be, the principle is the same. It is that the safety fund banks may be justly compelled to pay whatever losses might otherwise be incurred by the creditors, or at least by the holders of the bank-notes, of any of those banks.

Those creditors, or bill-holders, have no natural right of recourse on any other bank than that of which they are creditors or bill-holders. They have, by virtue of the Safety Fund Act, acquired an indubitable, though artificial, right to the proceeds of that fund; that is to say, to one-half per cent. a year on the capital of each of the safety fund banks. But that right goes thus far and no farther. On anything beyond it they have neither a natural nor an artificial legal right.

Men, whether acting individually or as members of an association, and, in the last case, whether incorporated or associated either by virtue of any legislative act or spontaneously, are naturally responsible for their own acts only, and not at all for those of other men or associations. If it has been a condition of the charters of the banks that they should become responsible to a certain extent, to that extent only are they bound, and no further. To compel them to pay anything beyond that amount, or at a different time, is to take their property for the benefit of those who have no right to it, and is, therefore, manifestly unjust. Even when it becomes absolutely necessary to take property for public use, it cannot be done without just compensation.

Our system of chartered banks may be founded on erroneous principles; and it may become proper, if it be practicable, to substitute for it one that shall be free to all and rest exclusively on personal responsibility. In the mean while, and so long as those banks are permitted to exist, the rights of the stockholders are as sacred as those of the owners of any other species of property.

There is a striking contrast in the treatment respectively experienced by the banks in this State and by those of some other parts of the Union. Those in the States south and west of New York have, through the extraordinary and unaccountable indulgence of the respective Legislatures, been permitted, after having suspended their specie payments, to persist in a continued violation of their engagements for more than two years. Those in this State, which in the first instance resumed those payments alone, which have ever since continued to supply a currency equal to specie, and whose failure would infallibly be followed by a general suspension of specie payments throughout the Union, are alone selected as special objects of aggression.

The banks of this State are entitled to no particular merit for that which was only the performance of a sacred duty. I do not wish for the slightest relaxation in their favor if they should fail to fulfil their engagements; and it is evident that they must pay their proportionate share of the general taxes. I ask only for strict justice, as well towards them as on their part, and that, therefore, they should not be subject to special and unjust taxation.

A deviation from justice has no limits, and naturally leads to acts of the same character. Thus, a proposition was lately made to substitute for a general tax of one mill intended for general purposes, a special tax of ten mills on banks and other moneyed corporations or associations. The holders of bank stock consist almost exclusively of two classes: 1st, women, children, and generally persons unable to engage in any active pursuits; 2d, capitalists, who divide their investments between stocks, mortgages, and real estate. The first class is in every respect utterly powerless, and may be oppressed with impunity. The second is that on which the State must exclusively rely for the loans it may want and for sustaining its credit. On the ground of expediency alone, an unjust tax laid on them is not calculated to increase their confidence in the State.

Whether it be for the payment of the floating debt, for the reimbursement, when it shall become due, of the funded debt, or for carrying on internal improvements, it is agreed on all hands that the State must raise money by loan; and it is evident that, in the present prostrated state of the public credit, it is impossible to obtain a loan without a loss, which will be greater in proportion to the amount of the loan required. The first indispensable preliminary is, therefore, to restore as far as practicable public credit and to raise the price of the public stocks.

The principal causes of the depression are not under the control of the Legislature. Such are the catastrophe of the United States Bank, the repudiation of their just debts, or the inability of paying the interest, by some of the States, and the lamentable situation of the fiscal concerns of the general government. It seems that the only other causes must be the disproportion between the supply and demand, or a want of confidence either in the resources or the integrity of the State. That disproportion is the only real difficulty in the case. To restore the equilibrium may require time. It is obvious that the object cannot be attained so long as the demand is not increased and new issues of stock take place. There are no other means of increasing the demand than to recur by equal taxation to the resources of the country, and to inspire a full confidence in the integrity of the State as well as in its resources. It should never be forgotten that every unjust legislative act is injurious to the character and to the credit both of the State and of individuals.

My opinion on the subject of the safety fund has always been the same, and it was expressed in the following words in an essay published in the month of June last:

“The annual tax of one-half per cent. imposed under the name of ‘safety fund’ is unjust towards the banks which are well administered, and injurious to the community at large. To make a bank responsible for the misconduct of another, sometimes very distant and over which it has no control, is a premium given to neglect of duty and to mismanagement at the expense of the banks which have performed their duty and been cautiously administered. That provision gives a false credit to some institutions which, not enjoying perfect confidence, would not otherwise be enabled to keep in circulation the same amount of notes; and it therefore has a tendency unnecessarily to increase the amount of paper money. The fund would be inadequate in case of any great failure, and it provides at best only against ultimate loss, and not at all against the danger of a general suspension.”

The loss which has now been incurred, and the delay which must ensue under the existing provisions of the law before the holders of the bills of the broken banks can be reimbursed, are to be regretted. But I am perfectly satisfied that the public good, not less than justice to the sound banks, requires that the safety fund should be no otherwise replenished than as now provided by the law. It is proper and useful that the people should learn that the fund gave but an imperfect and fallacious guarantee; that they should know that they must rely for the payment of bank-notes on the bank by which they were issued; and that each bank also should feel that it must henceforth rely exclusively on its own resources and the proper management of its affairs. This must necessarily check improper expansion either in circulation or in discounts. Instead of deteriorating, it will be a step towards improving our banking system. Instead of increasing, it will lessen the danger to which the community, and more particularly the most ignorant part of it, is exposed from the issues of unsound paper money.

I have, &c.

P.S.—I pray you to communicate this letter to the chairman of the committee on banks of the House of Assembly.