The Online Library of Liberty

A project of Liberty Fund, Inc.

• Notice.
• Letters On North America.
• Introduction.
• Letter I.: Railroad From London to Paris.
• Letter II.: Liverpool and the Railroad.
• Letter III.: War of the President of the United States Upon the Bank.
• Letter IV.: Democracy—the Bank.
• Letter V.: Movement of Parties.—bank Question.
• Letter VI.: Progress of the Struggle.—new Powers.
• Letter VII.: Railroads In America.
• Letter VIII.: The Banks.—the Preservation of the Union.
• Letter IX.: The First People In the World.
• Letter X.: The Yankee and the Virginian.
• Letter XI.: Lowell.
• Letter XII.: The Factory Girls of Lowell.
• Letter XIII.: The Bank.—slavery.
• Letter XIV.: The Elections.
• Letter XV.: Pittsburg.
• Letter XVI.: General Jackson.
• Letter XVII.: Public Opinion.
• Letter XVIII.: Cincinnati.
• Letter XIX.: Cincinnati.
• Letter XX.: Western Steamboats.
• Letter XXI.: Intercommunication.
• Letter XXII.: Labour.
• Letter XXIII.: Money.
• Letter XXIV.: Speculations.
• Letter XXV.: Bedford Springs.
• Letter XXVI.: Power and Liberty.
• Letter XXVII.: Social Improvement.
• Letter XXVIII.: Social Reform.
• Letter XXIX.: The Empire State.
• Letter XXX.: Symptoms of Revolution.
• Letter XXXI.: The Middle Classes.
• Letter XXXII.: Aristocracy.
• Letter XXXIII.: Democracy.

LETTER III.

WAR OF THE PRESIDENT OF THE UNITED STATES UPON THE BANK.

New York, January 1, 1834.

This country is now in the crisis of a high industrial fever, which has assumed a political character, and is of a very serious nature; for the industrial interest, in this country, is the most important. Last year, when the dispute between the Northern and Southern States, relative to the tariff was settled, (see Note 5 , at the end of the volume,) the wise and prudent thanked God, that the danger, which had threatened their country, had been averted; there seemed to them nothing further to obstruct its triumphant career of conquests over nature, with an ever accelerated rapidity and increased success. A series of causes, to appearance of slight moment, has changed these hopes into fears. Some trifling circumstances revived the old quarrel between the democratic party, to which the President belongs, and the Bank of the United States, and both sides grew warm. (See Note 6 , at the end of the volume.) President Jackson, a man of good intentions and ardent patriotism, but too hasty towards those who venture to contradict him, declared a deadly war against the Bank, and pushed it with all the energy and fury, in the same cut-and-thrust style, that he had the war against the Indians and English twenty years before. He set his veto to the bill that had passed both houses of Congress, renewing the Bank charter, which was about to expire in three years. Not satisfied with this blow, he withdrew from the hands of the Bank the public money, which, by the provisions of its charter, had been deposited in them, and which gave it the means of very materially extending its operations; for the excess of the deposits over the exigencies of the government amount to not less than ten millions. The Bank, which had paid to the government a bonus of 1,500,000 dollars for the privilege of being the depository of the public funds, cried out loudly against this measure, and with good reason, for no one denies, that no institution in the union is better able to meet all its liabilities. It has reduced its discounts, first, because the removal of the public deposits has diminished the amount of specie in its vaults, and also, as it declares, whether right or wrong, because its very existence being threatened by the President’s veto, it is prudent to restrain the sphere of its operations, and to prepare in time for the final settlement of its concerns. As this institution takes the lead in the financial world, the other banks, even those to which the public deposits have been transferred, have been obliged, in their turn, to restrict their operations. Not only are they afraid to extend their discounts in proportion to the amount of these deposits, but they are obliged to contract them, because they find themselves, as objects of the favour of government in this respect, in a state of hostility with the Bank of the United States, and it is necessary to be on their guard in the presence of so formidable an adversary. Thus are the sources of credit suddenly dried up. Now credit is the life-blood of the prosperity of the United States; without credit, the populous towns which are springing up on all sides, as if by magic, the opulent States, which, far away from the Atlantic and beyond the Alleghanies, stretch along the Ohio and the Mississippi, would become a solitary wilderness, savage forests or pathless swamps. The city of New York alone has twenty banks, the annual average discounts of which, during the last eight years, have amounted to one hundred millions. At Paris, where the transactions are certainly more extensive than in New York, the discounts of the Bank of France, in 1831, amounted to 223 million francs, and in 1832 to 151 millions.* The amount of the discounts of the Philadelphia banks, in 1831, was 150 millions. A general shock to credit, however transient, is here more terrible than the most frightful earthquake.

If I did not fear to lengthen out this letter beyond measure, I would give some details concerning the struggle between the two parties, concerning their tactics and their measures in Congress and out of it, concerning Mr Clay’s speeches and General Jackson’s home thrusts. But I think it more important at present, to call your attention to the part which the Bank of the United States has played since its establishment, and to the causes which stirred up against it that mass of hatred and distrust, from which General Jackson derives confidence in his measures. For it is not merely his own dislike that he gratifies; from the last elections, which in almost all the States are based on universal suffrage, it is plain that the numerical majority of the population is, at this moment, opposed to the Bank.

The Americans had already used and abused systems of credit while under the English rule. As soon as they had achieved their independence, they became bolder in their enterprises, more sanguine, or, if you please, more rash in their speculations. They stood in great need of credit; the number of banks was multiplied, and many abuses crept in. The State legislatures made no difficulty in granting bank-charters to whoever asked for them, and in this respect they have not changed their practice. If they imposed some restraints, they had no means of ascertaining or securing their strict observance. The banks, therefore, often issued an amount of bills wholly disproportionate to their real capital, not merely twice or thrice, but ten times the value of their specie and other means. The originators of the bank often chose themselves directors, and discounted no paper but their own, or rather they lent to themselves the whole circulation of the bank, on the bare deposit of the bank shares. This was an ingenious process to enable whoever pleased to coin current money, without ingots of gold or silver. The mismanagement of these banking companies has sometimes been such, that instances have occurred where the officers of the bank have, on their own authority, opened a credit for themselves, and generally admitted their friends to share in the privilege. Thus it was discovered, that the cashier of the City Bank in Baltimore had lent himself 166,548 dollars, and had made loans to one of his friends to the amount of 185,382 dollars; all the other officers had taken the same liberty, with the exception of one clerk and the porter.

The banks abusing the privilege of issuing bills, that is to say of making loans, individuals abused the privilege of borrowing; hence mad speculations, and consequently losses by the lender and borrower. The banks cloaked theirs by new issues of paper, individuals theirs by new loans; but there were many failures of speculators, and some of banks. The latter excited the public indignation without reforming any one. The honest and moderate working classes, the farmers* and mechanics, who found that in the end they were the dupes of the speculators, since by the depreciation of the paper money, which they had taken as so much specie, they came in for a share of the loss, but had no part in the gain, that is, in the dividends, conceived a violent hatred against the banking system. To this particular cause of dislike, was added that aversion which may be found in Europe and everywhere else, felt by persons of methodical habits, gaining little by hard labour, but gaining regularly, against those who are impatient to make their fortune, and to make it at all events, and who waste what they make in the most unbounded luxury and by the most foolish enterprises, in less time than they have been in acquiring it. Then there was the natural jealousy of simplicity against cunning, of slow and heavy minds against the shrewd penetration of others. There was also that suspicious distrust of all new influences, and all power that aims to strike its roots deep, a distrust, which is essential to the American, and which is the source, explanation, and safe-guard of his republican institutions. In short, in 1811, when the old Bank of the United States, which was on a much smaller scale than the present Bank, petitioned Congress for a renewal of its charter, an appeal was made to the farmers and mechanics, and, as at the present day, the hobgoblin of a new aristocracy, and the worst of all, an aristocracy of money, was summoned up; the petition was not granted.

Soon after, in 1812, war broke out between England and the United States. The natural effect of war is to diminish confidence, to make the merchants timid, speculators cautious. Most of the banks, having been managed with little prudence in better times, were soon unable to meet the call for specie by the public; they solicited and obtained from their respective legislatures leave to suspend specie payments. Their bills had a forced circulation. At the peace of 1815 the banks were not able to resume specie payments, and the system of inconvertible paper money was persevered in. Imagine then two hundred and fortysix classes of paper money,* circulating side by side, having all degrees of value, according to the good or bad credit of the bank which issued them, at 20 per cent., 30 per cent., or 50 per cent. discount. Gold and silver had entirely disappeared; there was no longer any standard of price and value; the amount of bills in circulation had become prodigious.† To the bills of the banks was added a great amount of individual obligations of still less value, issued by private persons as suited their wants, and which circulated more or less freely in the neighbourhood. It was a frightful scene of confusion, a Babel, where all business became impracticable from the utter impossibility of the parties understanding each other.

It was now felt that, to restore order in the bosom of this chaos, there was needed a regulating power, capable of commanding confidence, with ample funds to enable it to pay out specie freely, and whose presence and, in case of necessity, whose authority, should serve to recall the local banks to their duty. In 1816, the present Bank of the United States was, therefore, chartered by Congress for a term of 20 years, with a capital of 35 millions, and it went into operation on the 1st of January, 1817. The seat of the mother-bank is Philadelphia, and it has 25 branches scattered over the Union. By its interference and assistance specie payments were resumed by the New York, Philadelphia, Baltimore, Richmond, Norfolk Banks on the 20th February, 1817, and in course of time all the other Banks followed the example. This resumption of specie payments was, first for the banks and then for individuals, the signal, the occasion, the rule of a general settling up of old accounts. As there had been much prodigality, unsuccessful speculations, and dead loss, accumulated through a period of 20 years, there was now a complete breaking up; many banks failed or suspended their operations, and from 1811 to 1830, 165 banks were reduced to one or the other of these alternatives. This state of things lasted three years; they were three years of crisis, three years of suffering for industry, that is for the people of the United States; for this people is identified with its commerce. The trials of this period have left a deep and lasting impression. Hatred of speculators and of the Banking system has taken root in the hearts of the mass of the people, and now springs up in hostility to the Bank of the United States, which, in the eyes of the multitude, is the representative of the system, although it is itself innocent of the mischief, and can alone prevent its recurrence.

The antipathy of the greatest number against the banks has then a reasonable cause, but it is not, therefore, any the less blind and unjust. They see nothing but abuses, and shut their eyes against the advantages. The great extension of credit, which resulted from the great number of banks, and from the absence of all restraint on their proceedings, has been beneficial to all classes, to the farmers and mechanics not less than to the merchants. The banks have served the Americans as a lever to transfer to their soil, to the general profit, the agriculture and manufactures of Europe, and to cover their country with roads, canals, factories, schools, churches, and, in a word, with every thing that goes to make up civilization. Without the banks, the cultivator could not have had the first advances, nor the implements necessary for the cultivation of his farm, and if the credit system has given facilities for stock-jobbing to speculators, it has also enabled him, although indirectly, to buy at the rate of one, two, or three dollars an acre, and to cultivate lands, which are now, in his hands, worth tenfold or a hundred fold their first cost. The mechanics who attack the banking system, forget that they owe to it that growth of manufacturing industry, which has raised their wages from one dollar to two dollars a day. They forget that it furnishes the means by which many of their number raise themselves to competence or wealth; for in this country every enterprising man, of a respectable character, is sure of obtaining credit, and thenceforth his fortune depends upon his own exertions.*

At the end of 1819, commerce revived, the financial system of the United States seemed settled on a sure basis. Since that time, some shocks have been felt, as in 1822, and in 1825, the latter the reaction of the great English crisis, but in both cases the storm soon passed away. The root of the evil was struck on the day that the Bank of the United States went into operation. This great establishment, which committed some errors at first and paid the penalty, has for a long time been conducted with the most consummate prudence. Most of the leading commercial men, that is to say, most of the talents, of the country are attached to it as directors, and its foreign correspondents or associates are the houses whose credit is most firmly established, such as the Barings of London, and the Hottinguers of Paris. It exercises the necessary control over all the local banks, obliges them to restrain their emissions by calling upon them for specie, or by refusing to receive their bills when the issues are excessive. It was by its agency that the currency of the United States was established on so large a basis, that, in 1831, the banks were able, without any effort, to discount the amount of 800,000,000 dollars, in the principal cities of the Union, or 1,100,000,000 for the whole country.

Now, this state of prosperity seems to be coming to an end. Here, in New York, the banks have ceased to discount, and on good paper, for two or three months, 15, 18, and 24 per cent. per annum have been paid, the usual rate of the Bank of the United States, and of most of the local banks, being 6 per cent. At Philadelphia, 18 per cent. per annum has been given on excellent paper at short dates. At Baltimore, merchants of great wealth have been obliged to stop payment. Nobody buys; nobody can sell. Orders for foreign goods are held back; and as every body here is engaged in business, this state of things threatens all interests, is the subject of all conversations, of all writing, and of all thoughts. God grant that the sight of the impending danger may calm the passions, and that the good sense of the community may banish empty prejudices and false fears! God grant that both parties may forget their mutual animosities in their anxiety for the common welfare! This should be our prayer, not only for the sake of the destinies of this great nation, but also because our silk manufacturers and the owners of our vineyards, will pay a part of the expenses of the campaign against the banks in general, which the radical party is about to open, by a mortal contest, with the Bank of the United States.

[* ] The maximum of the discounts of the Bank of France was in 1810, when it amounted to 710 million francs. In 1813, they were 640 millions, in 1826, 689 millions; at these two periods the Bank made a great effort to sustain commerce. It had less courage in the crisis of 1831—32.

[* ] The Americans have retained the English word farmer, which properly signifies one who cultivates a hired soil, fermier, although among them the cultivators are proprietors.

[* ] The number of banks at that time.

[† ] There was more paper in circulation in 1816 than in 1834, when the extent and value of business were very much greater.

[* ] The mechanics and farmers have no credit open at the banks, but the traders from whom they buy their tools, implements, raw material, and provisions, having that advantage, are able to deal with them on favourable terms; the farmer and mechanic are thus benefitted indirectly, if not immediately, by the banks.

[Note 5—page 38]omitted.

[Note 6—page 38.] All the banks in the United States, like the Bank of France in Paris, are at once banks of discount and loan, and banks of deposit and circulation. Almost the whole currency of this country consists of paper-money, the metals being chiefly in the the vaults of the banks, which cannot dispense with them, because their bills are payable on demand in gold and silver.

The old Bank of the United States, founded in 1791, had a capital of ten million dollars, the Federal government holding one fifth of the stock. The present Bank was incorporated in 1816, with the right of establishing any number of branches. The Bank of England also has branches in Manchester, Birmingham, Liverpool, Leeds, Gloucester, Bristol, Hull, Newcastle, Norwich, Swansea, and Exeter. The Bank of France has but two branches, one at St. Etienne and the other at Rheims, both established since 1836.

The capital of the Bank of the United States is 35,000,000, in 350,000 shares of 100 dollars each. That of the Bank of England is 11,000,000 pounds, divided into shares of one hundred pounds; and that of the Bank of France is 90,000,000 francs, in shares of 1000 francs, of which 22,100 are held by the Bank itself. The United States’ Bank stock was at a premium of 25 to 30 per cent. before General Jackson began his war upon it, that of the Bank of France is at an advance of 129 per cent., and that of the Bank of England at 116 per cent. advance.

The operations of the Bank of the United States consist in discounting commercial paper with two names, in making advances upon public stock and other securities, and in trading in the precious metals. The Bank of France discounts commercial paper with three names, or with two names and a deposit of Bank stock as collateral security. It is at present authorised to advance four-fifths on public stock on the sole guarantee of the depositor. It also makes advances on deposits of bullion and foreign coins, charging a commission of one eighth for fortyfive days, or one per cent. a year. The commercial attributes of the Bank of England are still more limited than those of the Bank of France. It makes no advances on public securities, except while the transfer books are closed, which occurs for a certain period in London.

The Bank of the United States discounts at the rate of six per cent.; the Bank of France at four per cent.; and the Bank of England at different rates, but rarely at less than four per cent., which is high in London. In 1836, the rate was advanced to four and a half and five per cent. The Bank of the United States effects foreign and domestic exchanges; the Bank of England only domestic exchange, which it does without charge for those who have an account open with it; and the Bank of France operates neither.

The circulation of the Bank of the United States has varied within late years from ten to twenty millions; in October 1835, it was twentyfive millions, consisting chiefly of five and ten dollar notes. Of late years the circulation of the Bank of England has amounted to about 100 million dollars. Since 1830, the Bank of France has usually had a circulation of forty millions, so that the two last institutions play a more important part as banks of circulation, than the first. In the United States, the five or six hundred local banks, whose aggregate circulation is five or six times greater than that of the United States’ Bank, perform this service. This coexistence of more than five hundred distinct currencies is the great defect in the financial system of this country. The joint-stock banks, which have been of late much multiplied in England, tend to introduce the same confusion into that country.

The Bank of the United States has generally in its vaults about ten millions in specie, but during the struggle with General Jackson, it had, at times, a sum equal to its bills in circulation, or from sixteen to eighteen millions. The Bank of England endeavours to keep on hand from forty to fifty millions, but it sometime sinks as low as thirty. The Bank of France always has at least twenty and sometimes more than forty millions; in 1832, it had fiftythree millions, or more than its whole paper circulation.

The Bank of the United States does not discount notes of above four months’ date, although this restriction is voluntary; the great mass of its discounts is on paper of two months date. The Banks of France and England cannot discount bills of more than 90 days date.

The bills of the United States Bank circulate throughout the Union; the revenue officers are obliged to receive them on the same footing as specie. The Bank, in return, is obliged to redeem them in specie on demand, under penalty of paying interest on the sum demanded at the rate of 12 per cent. per annum, and of forfeiting its charter. It is not, however, bound to redeem the bills of the branches, except at their respective counters, although it does so in fact. The bills of the Bank of England are a legal tender in England, and with the exception of those of the branches, are redeemable in gold and silver only in London. The bills of the Bank of France are current only in Paris, and are not there a legal tender.

The Bank of the United States and the Bank of France only issue bills payable to bearer; the Bank of England has a certain amount of Bank post-bills, or bills payable to order at seven days sight, being equivalent to about one tenth or one twelfth of its whole circulation.

The Bank of the United States receives deposits, on which it pays no interest. The Scotch banks pay interest on deposits at the rate of 2 to 2½ per cent. The Banks of England and France do not pay interest on deposits, but the latter gets bills on Paris cashed for its depositors without charge.

The number of accounts current opened by the Bank of the United States is indefinite; in that country and Scotland almost all persons have an account with the banks, and are thus freed from the necessity of keeping any considerable sums on hand. They hardly keep enough in the house to defray the expenses of the household for a few days, and payments are made by checks on a bank. The banks are, therefore, the cashiers of the whole community. This concentration of the whole disposable fund of the country in the banks, gives them the means of extending their operations greatly, and renders the capital, which would otherwise be scattered about and lie idle, active and productive.

The dividends of the Bank of the United States have been regularly at the rate of seven per cent.; those of the Bank of France vary from eight to ten on the original capital; those of the Bank of England are at present eight per cent. on the nominal capital, which is the original capital successively modified by acts of parliament. Independently of the ordinary dividends, which were originally seven per cent., afterwards rose to ten, and are now eight, the Bank of England has made several extraordinary dividends, and it increased the nominal capital on which the dividends are paid, twentyfive per cent. in 1816. Mr McCulloch makes the total sum of the extraordinary dividends and of the reserved profits carried to the extension of the capital, from 1799 to 1832, eightytwo millions, which with the reimbursements required by the new charter, amounts to one hundred and five millions. The Bank of France has divided beyond its ordinary dividends, the sum of four and a half millions.

The Bank of the United States, previous to 1834, was charged with the keeping of the public moneys, which were remitted to it by the collectors and receivers and of which it was the legal depository, with the transfer of funds for the service of the Treasury, and with the payments on the public debt and of pensions. It is forbidden to lend more than 500,000 dollars to the Federal government, and more than 50,000 to any State. In this respect it differs from the Banks of France and England, which make, and especially once made, enormous advances to the state. This is the principal object of the Bank of England, the whole capital of which is lent to the government at the rate of three per cent. Besides this the Bank of England receives the Exchequer Bills, and the Bank of France the Treasury Certificates (bons du Tresor), which bear a low rate of interest. These banks have made inconceivable loans to the state in time of war; in 1814, the advances of the Bank of England amounted to 165 millions, inclusive of the public deposits, which sometimes amounted to 60 millions. The Bank of France, however, has at present little connexion with the government, and has, therefore, greatly extended its commercial operations. In 1836, it had on hand notes to the value of 27 million dollars, without reckoning four millions advanced on deposits of public funds; from 1830 to 1835 the amount had not exceeded seventeen millions.

The local or State banks in the United States are organized on principles analogous to those of the National Bank. They are incorporated companies, receiving their corporate privileges from the States, and, therefore, confined to the limits of the State. Sometimes their bills are not current out of the town or county in which they are situated. They are institutions of credit and circulation almost exclusively for the use of merchants. Not having the resource of exchanges, and rarely having any deposits, they aim to enlarge their profits, by extending their circulation through excessive discounts and loans, which often floods the country with an excess of paper money. Their capitals seldom exceed one million dollars, and are often much less; but several have lately been established in the South with capitals of from three to ten millions.

In England the private bankers have the right of emitting bills payable to bearer, except, if there are less than six partners in the house, within the distance of sixty miles of London; in point of fact there are none issued within that space. The bills issued by private bankers amount to about 8,500,000 pounds. In Paris, the Bank of France has the exclusive privilege of issuing bills payable to bearer.

The joint stock banks in England are not chartered companies, nor are they under any control. All the partners are personally responsible. These country banks are very numerous, and they offer, perhaps, less security than the American State banks. In all times of crisis, in 1792-93, 1814-15-16, 1825-26, many of them have become bankrupts or suspended payment; in 1816, 240 were obliged to take one of these alternatives. In 1809 their issues amounted to 24 million pounds; in 1821-23, they had fallen eight millions, and in 1825, had again risen to fourteen millions. Since the suppression of notes of less than five pounds, they have been much reduced. At present (1836), these institutions are becoming multiplied to such a degree as to inspire serious alarm in prudent men.