IN SENATE,

January 27, 1832.

REPORT

Of the committee on banks and insurance companies, on applications to the Legislature for banking institutions.

The committee on banks and insurance companies, having observed the unusual number of applications to the Legislature for banking institutions, to be located in various parts of the State, and particularly in the city of New-York, for which place there are ten of these institutions noticed in the State paper to be applied for at the present session; and in order that the Senate may know the opinion of their committee on this subject, they beg leave to submit the following

-REPORT: !

That although they are ready to admit the great utility of banking institutions to the trading and manufacturing interests of this State, they are nevertheless of opinion that there ought to be some limit to their creation by the Legislature. In this opinion the committee believe they express the sentiments of a large majority of those who have thought on and understand the subject, and therefore the only difference which can exist is, to what amount that limit shall extend.

The danger to be apprehended, under the present system, seems to be the unbounded confidence which it is calculated to inspire in the community at large. This confidence has a tendency to impair that watchfulness, which was always on the alert when banking institutions were applied for; and the general belief that the bank fund is an unfailing security to the creditor, is calculated to favor [S. No. 22.]

1

and increase the demand for these institutions, to an alarming

extent.

It is frequently urged by applicants for new charters, that under the present system there can be no danger of increasing bank capital that the greater the capital the greater will be the fund set apart for the redemption of debts, in the case of failure. The committee, however, cannot subscribe to this opinion. Banking business, like all other business, may be overdone, and if more institutions are created than are necessary and proper, the result eventually must be, they will be compelled to wind up and discontinue, or they will become insolvent and explode.

Banking cannot be safely extended beyond its legitimate bounds; and it may readily be conceived, that one banking institution may be well and profitably sustained in a county, or given extent of country, while, if the same business was divided between a number of these institutions, all would eventually become unproductive, or fail.

The principle is pretty generally conceded, that no paper medium for circulation can be safe for the community, except it be based on a specie capital, of sufficient amount at least to redeem the ordinary return of bank bills from circulation. But what amount of specie each bank ought to retain in their vaults for this purpose, and in order to meet any emergency that may occur in the prosecution of their business, is a question the committee are not prepared to answer, from any data now in their possession.

It must be admitted, that an increase of banking capital in places where one or more banks are already in operation, does not increase the amount of specie, it merely takes from the amount then held by the banks in operation a certain portion, and places it into the possession of those then going into operation. Neither will the creation of new banks, in a place like New-York or Albany, for instance, where there are already a considerable amount of banking capital, increase the ability of the institutions, in the aggregate, to extend with safety their loans and discounts; for in the same ratio as the specie capital is divided, the deposits and circulation will be lessened to the banks respectively; and the means of the existing banks being lessened by the operations of those brought into existence, the accommodation to the public, in the aggregate, will rather be diminished than increased. By the concentration of capital in what may be deemed a sufficient number of banking institutions,

there is more ability to extend the necessary accommodation to the public, than when the same amount of capital is diffused among a much greater number of them. The same rule which operates in the case of individuals, will operate in the case of banks. If one. hundred thousand dollars be equally distributed among five hundred individuals, each would only have the ability to loan two hundred dollars; but, if the same sum was held by a single person, his loans may be extended to thousands, and so to the amount of the sum concentrated, or required as loans.

There are seasons, in the course of trade, when there will be a redundancy of specie in the country; but this seldom continues for any considerable period, as the operations of foreign commerce, and the effects of trade, naturally draws from the country all the specie which the credit of the banks and other facilities of trade will warrant.

The evil is, that whenever banks find their vaults well stored with the precious metals, they uniformly extend their discounts, and thus throw into circulation an increased amount of their bills. Banks will overtrade, as well as individuals, and the consequences are the same to both. The objects of the directors and stockholders of a monied institution are, to make the largest possible amount of interest out of their capital, and to effect this object, they frequently extend their loans and discounts beyond due limits. The facilities thus afforded their dealers is an inducement to enter into speculations, either by the purchase of articles with a view to a considerable rise in the price, or for the purpose of export, or, by importing an amount of foreign goods, far above the wants or consumption of the community. The demand for these articles being limited by the consumption, and other circumstances, much of the goods thus purchased or imported, lay on hand unsold, and consequently are reduced in their value. A disappointment in realizing the avails of this property in cash, and payment for the goods imported becoming due, the banks are pressed for additional loans, with which foreign bills are purchased, or the specie is drawn from the vaults, and sent, where something more valuable than bank bills is necessary, for the payment of debts. The banks feel the effect of this withdrawal of their specie, and a reduction of their discounts follow, producing the embarrassment, if not the failure, of their dealers. In time, the evil corrects itself, but at the cost of the whole trading community, either by the failure of their debtors, the diminished means of others, and the reduction in the general value of merchandize and other property.

The extensive commerce of this State, and the ever prevailing propensity of man to raise a fortune with the greatest possible ease and rapidity, naturally tend to bring about these revulsions in our currency. The main cause of them, however, as the committee believe, is nearly the same in every instance, viz. the extraordinary loans and issues of the banks, in the first instance, and the conséquent overtrading of individuals, induced by such loans and issues.

In order to prevent the withdrawal of the specie from the country during the late war with Great Britain, the banks in the city of New-York suspended specie payments. This enabled them to extend their loans and discounts to an unlimited amount, and the consequence was, that after peace was proclaimed, and the resumption of specie payments effected, embarrassment and failure were experienced to an alarming extent.

The years 1824 and 1825 was another period of failure and distress. The exportation of specie from the port of New-York in 1825 was between two and three millions of dollars more than the imports; a sure evidence of the extraordinary issues of the monied institutions of that city. It was in these years also, that the legislature chartered an unusual number of monied institutions for the city of New-York, which entered extensively into the discounting of notes and the issuing of their bonds as money. The result was, the failure of several of these newly created institutions, together with more than one hundred mercantile and trading houses of that place.

In 1830 specie was more abundant than it had been known to exist for a great number of years before, and the consequent loans and issues by the banks has been proportionably great. But in 1831, as the committee are informed, the exportation of specie from the port of New-York has been unusually large. More than a million and a half was shipped during the two first quarters of the year, and it is judged that a much larger quantity was sent off in the two last quarters. This withdrawal of the precious metals has, as usual, been felt by the banks, and in their endeavors to correct the error of over issues, much embarrassment, as the committee are assured, now exists among the mercantile and trading population of that city.

If banks were confined in their discounts and loans, to bills or notes received for goods sold in the regular course of business, the evils referred to by the committee, it is believed, would rarely be

experienced; but whenever a considerable portion of the business of banks consists in the discounting of what is called accommodation notes, not such as are given for a valuable consideration, and which it is the intention of the makers to pay at maturity, but notes made for the purpose of raising money on the credit of the drawers and endorsers, to be renewed as often as the wants of the borrower, or the pleasure of the lender, will permit, it will certainly follow, when specie is in demand, and the vaults of the barks are resorted to, that any considerable reduction of these loans will be found impracticable; and in order to ward off the danger of an insufficiency of specié to meet the demand, a bank thus situated will be compelled to refuse further loans, even to those whose regularity in business ought to entitle them to the accommodation. In this way, the evil is not only visited on those who borrow on accommodation paper, but on the bank which discounts it, as well as on a portion of the business part of the community.

These revulsions in trade may be owing to other causes, besides those assigned by the committee; but that one of the principal sources of the evil is the overtrading of a portion of the community, as well as the banks, they think cannot be denied. If evidence were wanted, it would only be necessary to refer to the fact, that in almost every instance, an unusual exportation of specie seems to precede the pressure and embarrassment in trade; and taking into consideration the fact, in connection with the time of exportation, it would seem to follow, that the cause can be no other than the one stated.

A redundancy of bank capital is an evil, which has been severely felt by several of our sister States, and will be felt again, whenever the issue of paper shall be so abundant, as to cause a considerable depreciation in its value, and by that means, shake the confidence of the public in the institutions issuing it. The resuit of unduly increasing these institutions in the States of Pennsylvania, Ohio, Kentucky, and other places, has been disastrous in the extreme, and ought to be a warning to every one, who is not reckless of the consequence, to use their influence to prevent a like result with us. The committee might refer to facts resulting from the same princi ple in other countries, were it necessary. The disasters which af flicted the whole nation by the failure of the Bank of France, not+ withstanding the strong arm of power was exerted to uphold the institution, is a case in point, as the catastrophe was entirely owing to the enormous amount of paper thrown into circulation, and which