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THE MONOPOLY BANKING SYSTEM - William Leggett, Democratick Editorials: Essays in Jacksonian Political Economy 
Democratic Editorials: Essays in Jacksonian Political Economy, Foreword by Lawrence H. White (Indianapolis: Liberty Fund, 1984).
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THE MONOPOLY BANKING SYSTEM
Sedgwick gives simply “December, 1834.” Attempts to locate the original have been unsuccessful.
It is a source of sincere pleasure to us to perceive that the attention of the people is seriously awakened to the subject of the Bank system, as it exists in this country. It seems to us quite evident that the sentiment is daily gaining ground that the whole system is erroneous—wrong in principle and productive of incalculable evils in its practical operation. Those who have been readers of the Evening Post, for the last six or eight months, have had this subject fully and freely discussed, not only in articles from our own pen, but in numerous excellent communications from able correspondents, and, more especially, in the clear, comprehensive, and unanswerable essays of Mr. Gouge, which, with the author’s permission, we copied from his admirable work on American Banking.1 Those who perused these various productions, with the attention which the important and interesting nature of the subject required, have possessed themselves of sufficient materials for the formation of a correct opinion; and we have the satisfaction of knowing that very many of our readers concur fully with us in the sentiments we entertain with regard to our banking system.
We look upon that system as wrong in two of its leading principles: first, we object to it as founded on a species of monopoly; and secondly, as supplying a circulating medium which rests on a basis liable to all the fluctuations and contingencies of commerce and trade—a basis which may at any time be swept away by a thousand casualties of business, and leave not a wreck behind. There are many other objections incident to these, some of which present themselves in forms which demand the most serious consideration.
Our primary ground of opposition to banks as they at present exist is that they are a species of monopoly. All corporations are liable to the objection that whatever powers or privileges are given to them, are so much taken from the government of the people. Though a state legislature may possess a constitutional right to create bank incorporations, yet it seems very clear to our apprehension that the doing so is an invasion of the grand republican principle of Equal Rights—a principle which lies at the bottom of our constitution, and which, in truth, is the corner-stone both of our national government, and that of each particular state.
Every charter of incorporation, we have said, is, to some extent, either in fact or in practical operation, a monopoly; for these charters invariably invest those upon whom they are bestowed with powers and privileges which are not enjoyed by the great body of the people. This may be done by merely combining larger amounts of capital than unincorporated individuals can bring into competition with the chartered institution; but the end is more frequently effected by the more palpably unjust process of exonerating the chartered few from liabilities to which the rest of the community are subject, or by prohibiting the unprivileged individual from entering into competition with the favoured creature of the law.
When a legislative body restrains the people collectively from exercising their natural right of pursuing a certain branch of business, and gives to particular individuals exclusive permission to carry on that business, they assuredly are guilty of a violation of the republican maxim of Equal Rights, which nothing but the plainest paramount necessity can at all excuse. This violation is the more palpable, when immunities are granted to the few, which would not have been enjoyed by the people, had their natural rights never been restricted by law. In the case of Bank incorporations such is clearly true; since those who are thus privileged are protected by their charters both from the competition of individuals, and from loss to any greater extent than the amount of capital they may risk in the enterprise—a protection which would have been enjoyed by no member of the community, had the law left banking on the same footing with other mercantile pursuits. As a monopoly, then—as a system which grants exclusive privileges—which is at variance with the great fundamental doctrine of democracy—we must oppose Bank incorporations, unless it can be shown that they are productive of good which greatly counterbalances the evil.
A second objection to our banking system is that it is founded on a wrong basis—a basis that does not afford adequate security to the community; since it not only does not protect them from loss by ignorant or fraudulent management, but not even from those constantly recurring commercial revulsions, which, indeed, are one of the evil fruits of this very system. The basis of our banking business is specie capital; yet every body knows that the first thing a bank does, on going into operation, (if we suppose the whole capital to have been honestly paid in, which is very far from being always the case) is to lend out its capital; and the profits of the institution do not commence until, having loaned all its capital, it begins to loan its credit as money. No set of men would desire a bank charter merely to authorize them to lend their money capital at the common rate of interest; for they would have no difficulty in doing that, without a charter, and without incurring the heavy expense incident to banking business. The object of a bank charter is to enable those holding it to lend their credit at interest, and to lend their credit too, to twice, and sometimes three times, the amount of their actual capital. In return, then, for its capital, and for the large amount of promissory obligations issued on the credit of that capital, the Bank holds nothing but the liabilities of individual merchants and other dealers. It must be evident then that its capital is liable to all the fluctuations and accidents to which commercial business is exposed. Its integrity depends upon the ability of its dealers punctually to discharge their obligations. Should a series of commercial disasters overwhelm those dealers, the capital of the Bank is lost, and the bill holder, instead of money, finds himself possessed of a mere worthless and broken promise to pay.
Let us trace the progress of a new banking institution. Let us imagine a knot of speculators to have possessed themselves, by certain acts of collusion, bribery, and political management, of a bank charter; and let us suppose them commencing operations under their corporate privileges. They begin by lending their capital. After that, if commercial business is active, and the demand for money urgent, they take care to put as many of their notes in circulation as possible. For awhile this does very well, and the Bank realizes large profits. Every thing seems to flourish; merchants extend their operations; they hire capacious stores, import largely from abroad, sell to country dealers on liberal terms, get the notes of those dealers discounted, and extend themselves still further. Others, in the meanwhile, stimulated by this same appearance of commercial prosperity, borrow money (that is notes) from the Bank, and embark in enterprises of a different nature. They purchase lots, build houses, set railway and canal projects on foot, and every thing goes on swimmingly. The demand for labour is abundant, property of all kinds rises in price, and speculators meet each other in the streets, and exult in their anticipated fortunes.
But by and by things take a different turn. The exports of the country (which furnish the true measure of business) are found to fall greatly short of the amount due abroad for foreign fabrics, and a large balance remains unpaid. The first intimation of this is the rapid advance in the price of foreign exchange. The bank now perceives that it has extended itself too far. Its notes, which, until now, circulated currently enough, begin to return in upon it in demand for specie; while, at the same time, the merchants, whom it has been all along eager to serve, now call for increased accommodations. But the Bank cannot accommodate them any longer. Instead of increasing its loans, it is obliged to require payment of those which it had previously made; for its own notes are flowing in a continual stream to its counter, and real money is demanded instead. But real money it has none, as that was all lent out when it first went into operation. Here then a sudden check is given to the seeming prosperity. The merchants, unable to get the amount of accommodation necessary to sustain their operations, are forced to suspend payment. A rumour of the amount lost by the Bank in consequence of these failures, causes confidence in its solvency to be impaired, and being threatened with a run, it resorts to a still more rapid curtailment. Then follows wider derangement. One commercial house after another becomes bankrupt, and finally the Bank itself, by these repeated losses forced to discontinue its business, closes its doors, and hands over its affairs for the benefit of its creditors, Who are its creditors? Those who hold its money, that is, its “promises to pay.” On investigation it is discovered, most likely, that the whole capital of the institution has been absorbed by its losses. The enormous profits which it made during the first part of its career, had been regularly withdrawn by the stockholders, and the deluded creditor has nothing but a worthless bit of engraved paper to show for the valuable consideration which he parted with for what he foolishly imagined money.
What we have here stated can hardly be called a supposititious case—it is a true history, and there are events within the memory of almost every reader of which it is a narrative almost literally correct.
The basis of our banking system, then, if liable to be thus easily dissipated, is certainly wrong. Banks should be established on a foundation which neither panic nor mismanagement, neither ignorance nor fraud, could destroy. The billholder should always be secure, whatever might become of the stock-holder. That which is received as money, and which is designed to pass from hand to hand as such, should not liable to change into worthless paper in the transition.
A very important objection incident to the banking system of this country is the demoralizing effect which it exercises on society. It is a matter of the utmost notoriety that bank charters are in frequent instances obtained by practices of the most outrageous corruption. They are conceived in a wild spirit of speculation; they are brought into existence through the instrumentality of bribery and intrigue; and they exercise over the community the most unsalutary influence, encouraging men of business to transcend the proper limits of credit, and fostering a general and feverish thirst for wealth, prompting the mind to seek it by other than the legitimate means of honest, patient industry, and prudent enterprise. Let any man who has had an opportunity of observing the effect of introducing a banking institution, into a quiet country town, on the moral character of the inhabitants, answer for himself if this is not true. Let any man, whose knowledge enables him to contrast a portion of our country where banks are few, with another where they are numerous, answer if it is not true. Let any man whose memory extends so far back that he can compare the present state of society with what it was in the time of our fathers, answer if it is not true. The time was when fraud in business was as rare—we were about to say—as honesty is now. The time was when a failure was a strange and unfrequent occurrence; when a bankrupt excited the sympathy of the whole community for his misfortunes, or their censure for his rashness, or their scorn for his dishonesty. The banking system has made insolvency a matter of daily occurrence. It has changed the meaning of words, it has altered the sense of things, it has revolutionized our ethical notions. Formerly, if a man ventured far beyond his depth in business—if he borrowed vast sums of money to hazard them in doubtful enterprises—if he deluded the world by a system of false shows and pretences, and extended his credit by every art and device—formerly such a man was called rash and dishonest, but we now speak of him as enterprising and ingenious. The man whose ill-planned speculations miscarry—whose airy castle of credit is suddenly overturned, burying hundreds of industrious mechanics and labourers under its ruins—such a man would once have been execrated; he is now pitied; while our censure and contempt is transferred to those who are the victims of his fraudful schemes.
For its political effect, not less than moral, our bank system deserves to be opposed. It is essentially an aristocratic institution. It bands the wealthy together, holds out to them a common motive, animates them with a common sentiment, and inflates their vanity with notions of superior power and greatness. The bank system is maintained out of the hard earnings of the poor; and its operation is to degrade them in their political rights, as much as they are degraded in a pecuniary respect, by the accident of fortune. Its tendency is to give exclusive political, as well as exclusive money privileges to the rich. It is in direct opposition to the spirit of our constitution and the genius of the people. It is silently, but rapidly, undermining our institutions; it falsifies our grand boast of political equality; it is building up a privileged order, who, at no distant day, unless the whole system be changed, will rise in triumph on the ruins of democracy.
Even now, how completely we are monopoly-governed! how completely we are hemmed in on every side, how we are cabined, cribb’d, confined, by exclusive privileges! Not a road can be opened, not a bridge can be built, not a canal can be dug, but a charter of exclusive privileges must be granted for the purpose. The sum and substance of our whole legislation is the granting of monopolies. The bargaining and trucking away chartered privileges is the whole business of our law makers. The people of this great state fondly imagine that they govern themselves; but they do not! They are led about by the unseen but strong bands of chartered companies. They are fastened down by the minute but effectual fetters of banking institutions. They are governed by bank directors, bank stockholders, and bank minions. They are under the influence of a power whose name is Legion—they are under the influence of bank monopolies, with a host of associate and subordinate agents, the other incorporated companies, depending on bank assistance for their means of operation. These evil influences are scattered throughout our community, in every quarter of the state. They give the tone to our meetings; they name our candidates for the legislature; they secure their election; they control them when elected.
What then is the remedy for the evil? Do away with our bad bank system; repeal our unjust, unsalutary, undemocratic restraining law; and establish, in its stead, some law, the sole object of which shall be to provide the community with security against fraud. We hope, indeed, to see the day when banking, like any other mercantile business will be left to regulate itself; when the principles of free trade will be perceived to have as much relation to currency as to commerce; when the maxim of Let us alone will be acknowledged to be better, infinitely better, than all this political quackery of ignorant legislators, instigated by the grasping, monopolizing spirit of rapacious capitalists. This country, we hope, we trust, is destined to prove to mankind the truth of the saying, that the world is governed too much, and to prove it by her own successful experiment in throwing off the clogs and fetters with which craft and cunning have ever contrived to bind the mass of men.
But to suit the present temper of the times, it would be easy to substitute a scheme of banking which should have all the advantages of the present one, and none of its defects. Let the restraining law be repealed; let a law be substituted, requiring simply that any person entering into banking business shall be required to lodge with some officer designated in the law, real estate, or other approved security, to the full amount of the notes which he might desire to issue; and to secure, that this amount should never be exceeded, it might be provided that each particular note should be authenticated by the signature of the comptroller, or other officer entrusted with the business. Another clause might state suitable provisions for having the securities re-appraised, from time to time, so that bill holders might be sure that sufficient unalienable property was always pledged for the redemption of the paper currency founded upon that basis. Banking, established on this foundation, would be liable to none of the evils arising from panic; for each holder of a note would, in point of fact, hold a title-deed of property to the full value of its amount. It would not be liable to the revulsions which follow overtrading, and which every now and then spread such dismay and ruin through commercial communities; for when bankers are left to manage their own business, each for himself, they would watch the course of trade, and limit their discounts accordingly; because if they extended them beyond the measure of the legitimate business of the country, they would be sure that their notes would return upon them in demand for the precious metals, thus forcing them to part with their profits, in order to purchase silver and gold to answer such demand.
But much as we desire to see the wretched, insecure, and, in a political view, dangerous banking system superceded by the more honest and equal plan we have suggested, we would by no means be considered as the advocates of sudden or capricious change. All reformations of the currency—all legislation, the tendency of which is to disturb the relations of value, should be slow, well considered and gradual. In this hasty and unpremeditated article, we have glanced at the system which we desire may ere long take the place of the present one, and have rapidly adverted to some of the reasons which render the change desirable. But as a first step towards the consummation, we should wish the legislature to do nothing more at present than restrain the issue of notes under five dollars, and refuse to charter any more banks. The people demand it, and we do not think that the public sentiment is in favour of any further immediate reformation. As to the prospective legislation which is proposed by some, we think it anti-republican and unwise. We would not take advantage of any present movement of the public mind to fasten a law upon the state, which public sentiment may not afterwards sustain. The same influence of public opinion which, is now about to lead to the long-desired first step in Bank reform, will be potent in carrying on the reformation to the desired conclusion. A good maxim, and one which it will be well to be governed by in this matter, is festina lente.2
[1 ]A reference to William M. Gouge, AShort History of Paper Money and Banking in the United States (Philadelphia: T. W. Ustick, 1833).—Ed.
[2 ]“Hurry slowly.”—Ed.