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55

JOURNAL OF NAUTICAL INTELLIGENCE.

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THE

MERCHANTS MAGAZINE

AND

COMMERCIAL REVIEW.

FEBRUARY, 1862.

NATIONAL CURRENCY AND BANKING SYSTEM.

The plan proposed by Secretary Chase involves consequences so vast, that it should only be entered upon with the greatest deliberation. No incidental benefit to the Treasury should modify, in the least degree, the construction of a system which is to control the interests of a generation of business men. As a means of opening a new demand for government bonds, its legitimate effect could, at the most, only be moderate and gradual. And if that effect were forced by taxation upon existing currency, the derangement would be so great as to more than defeat the end. Such a plan would be feeble for present wants, while it might be potent for future mischief. The financial expedients adopted for the exigencies of war, whether an issue of demand Treasury notes, or whatever else they may be, should stand by themselves, like martial law, justified by the imperious needs of the hour, and to pass away with the return of peace. As war knows no law but necessity, the main question is, " What will most surely and promptly meet its demands with seast future damage?” Not so is it with a system which is to reach on to the time when the peaceful industries of the nation shall again require the energizing influences of a sound currency. Better, far better, that the whole plan should be postponed to the calm consideration of a day of peace, than that one point of strength should be sacrificed to present convenience.

This country has never yet had a banking system that could stand the test, either of a general panic, or an adverse balance of trade. And when we see, as in the case of Illinois, the disastrous and wide-spread effects of the failure of local systems, how immeasurably important that, in laying

9

VOL. XLVI. --NO. II.

the foundations of a national organization, we dig deeper and build broader than we have ever done before. Let us look, then, for some solid foundation-stones that have been wanting in the fallen structures of the past.

To prepare the way for minor propositions, we would first deny one fundamental error, and affirm its opposite truth. The error is, " That accumulations of specie are so much unproductive capital;" the denial of which lies in the fact, that if specie is represented by only an equal amount of paper taken for it, it is not dormant, but is circulating, and performing all the offices of currency by proxy, which it could not do if

did not exist the truthwewuld arm, that fathe machine ries of national industry, whether shipping, or canals, or rail-roads, or telegraphs, an indestructible currency is the cheapest, measured either by the work it performs, or the ruin which is caused by its loss. It is the motive-power which drives all the others. A good currency cannot cost too much.

In the light of this essential truth I shall endeavor to establish the following propositions, as of vital importance to the formation of either a State or National currency and banking system:

I. Specie is the only adequate basis of that portion of the whole paper currency which may, under any condition of panic or of adverse exchanges, be returned for payment.

II. The specie which is held for the security and redemption of the bank-note circulation, should be aggregated at the commercial and financial centres of the country.

III. The average aggregate of specie so held, should bear such a proportion to the total trade of the country that it could pay any possible foreign balances against it without exhaustion, and always leave enough remaining to sustain the currency and credits at home.

IV. The most effective general safeguard is, not any inflexible and hampering law, but intelligence in the public, and constant accountability on the part of the banks, through weekly published statements.

1. As all debts are made payable in money, as money is named in all contracts, and is the representative of values, nothing but money can satisfy the demand which arises in the periods of distrust when faith in promises is gone. The sale of public stocks will, of course, produce money at some rate, but, at such times, the market is soon glutted, and the securities, however good, depreciate and fail as a reliance. A vital fact in this question is, that the forcing of securities upon a panicstricken market aggravates the panic beyond all other causes. The better the securities are, the more complete and universal is the destruction of market values, by the forced sale and consequent depreciation of them. If

you have two hundreds of banknotecirculation, secured by United States bonds, and in a sudden panic you throw ten millions of these pontmarket, and they all to, the market values mutaneously fall in the same proportion.

This occurred in 1857, when, in a sound state of the trade of the country, mere panic sales forced New-York State stocks from 110 down to 70, and the State security system was totally broken down. A suspension of specie payments quickly followed, and the deposit banks of New-York came to the rescue of the country banks of circulation so

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promptly, by taking their notes on credit, that the fact that the system had failed and demonstrated its own imperfection, was hardly recognised. It, nevertheless, was a fact, and a momentous one in its bearing on the mode of organizing a national currency. For if the market could not take enough of New-York State stocks (unsurpassed in real value) to redeem the limited bank-note currency secured by them, what would be the result when the stock security of a national circulation of $200,000,000 should be thrown upon the same market?

The conclusion, then, is, that neither bonds and mortgages, nor State stocks, nor government bonds, nor British consols, nor any other form of property, can be safely made the security for the bank-note circulation, except for that portion of it which neither panics nor balances of trade can ever drive home for redemption, and which, therefore, (although nominally payable on demand,) may be regarded as a permanent loan from the people.

To this conclusion more than a century of experiments and failures have driven the statesmen of England, and it is now fully recognised and embodied in the organization of the Bank of England, and established by its successful working.

To this conclusion our own history and failures impel us, and will, till we accept it.

2. The specie or money which is held for the security and redemption of the bank-note currency should be aggregated at the commercial and financial centres of the country.

This is and has been the case in the actual working of all the existing banking systems of the States. The country banks of New-England, of New-York and of the whole interior, rest upon their deposits in the city banks, as the means of redeeming their circulating notes

. Most of their redemptions, (perhaps 99-100,) are actually made by drafts upon those city bank deposits, and as those deposits rest upon the specie in the city banks, that specie, at these centres of trade, is practically the real basis of the bank-note circulation of the whole country.

The modicum of coin which is kept in the country banks serves to furnish change to the people, and, occasionally, for the redemption of notes; but its relation to the security and redemption of the paper currency is of trifling importance.

It follows, therefore, that any law requiring the country banks of circulation to hold fixed per centages of specie would be contrary to the teachings of experience. Such a law would be evaded by the unsound banks. In the case of the sound banks, it would place the specie where it would be comparatively useless and unavailable. The specie is not wanted in the banks of the interior; and if it were, to compel them always to hold it, would be to forbid its use. Such a law would dispense with the heart, and require the hands and the feet to keep their separate supplies of stagnant blood.

We repeat, then, that the specie basis of the paper currency should be held—subject to actual use—at the centres of commerce and finance.

3. The average aggregate of specie which should be held at the commercial centre should bear such a proportion to our whole trade that it could pay any probable foreign debit balances without exhaustion, and always leave enough remaining to sustain the currency and credits at home.

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The non-recognition of this principle cost the nation the terrible experience of almost universal bankruptcy, and the long and painful struggle which followed the collapse of 1836. Previous to that

year

the country had run up balances of trade more than four times greater in amount than all the specie held by all the banks in the United States.

Again, so lately as 1857, the banks of New-York, holding about $12,000,000 of coin, which was then nearly their average stock, were able to bear a reduction of only about $3,000,000, being about one per cent. of the trade of the country each way, before they were driven to suspension. From that and many previous experiences, they have wisely adopted a much larger specie-basis, and by the strength thus attained, they have supported the confidence of the nation and the finances of the government through a crisis which, in former years, would have plunged it into bankruptcy.

The value of a stock of specie proportioned to the trade of the country, is strikingly shown in the action of the Bank of England, which has repeatedly paid foreign balances of twenty-five or thirty millions of dollars, with scarcely a rise in the rate of interest, or any disturbance of the course of credits and business.

In view of the foregoing principles, the following plan for a national currency and banking system is suggested:

1st. All future bank-note currency in the United States shall be issued in the manner following: The United States treasurer (or banking department) shall furnish to banks or bankers circulating notes equal in amount to ninety per cent. of the market value of United States bonds, which such banks shall deposit as security for such bank notes, and such banks shall keep their notes secured by an average excess of ten per cent. in United States bonds, at their market value.

2d. The aggregate amount of bank notes which may be so issued by the United States banking department shall not exceed an amount which, added to the amount in circulation under State laws, would be equal to, say $200,000,000, that being about the average amount which experience shows that the country will hold.

3d. The bank department shall hold, in sub-treasury or in special de posit, in specie, an average sum equal to twenty per cent of the bank notes issued to the banks upon the pledge of United States stocks.

4th. First, the bank department may, at the discretion of the Secretary of the Treasury, use any portion of the twenty per cent provided for in section second, or any specie in the treasury, to buy from the banks the United States bonds pledged with him by the banks, at ten per cent., or more, below the price at which such bonds were pledged; (that is, when the margin of security is exhausted ;) and, second, may also sell again the bonds so purchased whenever they shall be saleable at ten per cent. more than cost.

5th. In addition to the notes which may be issued on the pledge of United States stocks, the bank department may issue to the banks banknotes equal to the amount of specie which may be pledged with it as security therefor, such specie to belong to the banks, and to be held apart from the twenty per cent. provided for in section third, and such issue, so secured, may be independent of the limitation in section second.

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