Chapter VII: Section I: The Currency

The fundamental difficulty of this great question, now one of the most prominent in the United States, is indicated by the fact that, while the practice of banking is essential to a manufacturing and commercial nation, a perfect system of banking remains to be discovered.

When it is remembered that the question of the Currency has never yet been practically mastered in the countries of the Old World; that in America it has fallen into the hands of a young and inexperienced people; that it is implicated with constitutional questions, and has to be reconciled with democratic principles, it will not be expected that a passing stranger will be able to present a very clear view of its present aspect, or any decided opinion upon difficulties which perplex the wisest heads in the country. The mere history of banking in the United States would fill more than a volume: and the speculations which arise out of it, a library.

It is well known that there was an early split into parties on the subject of the constitutionality of a national bank. Washington requested the opinions of his cabinet upon it in writing; and Hamilton gave his in favour of the constitutionality of a national bank: Edmund Randolph and Jefferson against it. The question has been stirred from time to time since; while Hamilton's opinions have been acted upon.

The ground of objection is a very strong one. It lies in the provision that "all powers not delegated to the United States by the constitution, nor prohibited by it to the States, are reserved to the States or to the people." No power to establish corporations is, in any case, delegated by the constitution to the United States; nor does it appear to be countenanced by any fair construction of the permissions under which its transaction of the general business is carried on.

The answer to this is, that the supreme law of the country may give a legal or artificial capacity, (distinct from the natural,) to one or more persons, in relation to the objects committed to the management of the government: in other words, that the government has sovereign power with regard to the objects confided to it; all the limitations of the constitution having relation to the number of those objects. This was Hamilton's ground; and this is, I believe, the ground which has been taken since by those who shared his opinions on the main question. To me it appears as unsatisfactory as any other mode of begging the question. If the power of making corporations is to be assumed by the general government, on the ground of its being implied, the whole country might be covered with corporations, to which should be entrusted the discharge of any function exercised by the general government.

In countries differently governed from the United States, it appears as if it would be most reasonable either to have the currency made a national affair, transacted wholly by the government, on determined principles, or to leave banking entirely free. In neither case, probably, would the evils be so great as those which have happened under the mixture of the two systems. But in the United States, the committing the management of the currency to the general government is now wholly out of the question. Free banking will be the method, some time or other; but not yet. There is not yet knowledge enough; nor freedom enough of production and commerce to render such a policy safe. Meantime, various doctrines are afloat. Some persons are for no banking whatsoever: but mere money-lending by individuals. Some are for the abolition of paper-money, and the establishment of one public bank of deposit and transfer in each State. Some are for private banking only, with or without paper money. Some are for State incorporations, with no central bank. Others are for restoring the United States Bank.

No objections against banking and paper-money altogether will avail anything, while commerce is conducted on its present principles. It answers no practical purpose to object to any useful thing on the ground of its abuse: and while the commerce of the United States is daily on the increase, and the only check on its prosperity is the want of capital, there is no possibility of a return to the use of private money-lending and rouleaus.

The use of small notes may well and easily be discontinued. The experiment has been tried with success in Virginia, Maryland, and Pennsylvania. The prohibition might, perhaps, be carried as high as to notes of twenty dollars. There seems no adequate reason for the public being, further than this, deprived of the convenience of a representative of cash; a convenience so great that there is much more probability that the ingenious Americans will devise some method of practically insuring its convertibility, than that they will surrender its use. It has often occurred to me that out of the currency troubles of the United States, might arise such a discovery of the true principle (which yet lies hidden) of insuring the convertibility, or other limitation, of a paper currency, as may be a blessing to the whole commercial world. This is an enterprise worthy of their ingenuity; and one which seems of probable achievement, when we remember how the American merchants are pressed for capital, and how all-important to them is the soundness of their credit. The principle lies somewhere, if it could but be found: and none are more likely to discover it than they.

Private banking is, in the present state of affairs, necessary and inevitable; so that there is little use in arguments for or against it. Capital is grievously wanted, in all the commercial cities. There must be some place of resort for small amounts, and for foreign capital, whence money may issue to supply the need of commercial men. There must, in other words, be money stores; and, in the absence of others, private banks must serve the purpose. The amount of good or harm which, in the present state of things, they are able to do, depends mainly on the discretion or indiscretion of their customers; who, in common prudence, must look well whom they trust.

As for State incorporations, it cannot be said that they are absolutely necessary; though the arguments in favour of their expediency are very strong. More and more money is perpetually required for the transaction of commercial business; and in a different ratio from that required by the affairs of farmers and planters; since the latter receive their returns quickly; while the merchants of the sea-board have theirs delayed for long periods, and consequently require a much larger amount of capital. These larger amounts must come mainly from abroad, whence money can be had at four and five per cent. interest; while at home, from six to twelve per cent. is paid, even while foreign capital is flowing in. It is obvious that this foreign capital will enter much more abundantly through the credit of a State bank than through private banks. Small amounts of capital, dispersed and comparatively unproductive, will also be more readily brought together, to be applied where most needed, in a State bank, than among many small firms. The States of New York and Pennsylvania have carried on their improvements, their canals and rail-roads, as well as much of their commerce, by means of foreign capital; and the surpassing prosperity of those States may be considered owing, in a great degree, to this practice. The incorporation of a bank is not always to be considered in the light of a monopoly; it may be the reverse. It may enable a number of individuals, by no means the most wealthy in the community, to compete, by an union of forces, with the most wealthy. Corporations may be multiplied, as occasion arises, and, by competition, give the public the benefit of the greatest possible amount of service done at the least cost.

Such are the leading arguments in favour of State Banks. The objections to them are in part applicable to faulty methods of incorporation, and not to the principle itself. The special exemption from liabilities to which individuals are subject; the imposing of such inhibitions elsewhere as render the affair a monopoly; the making responsibility a mere abstraction, are great, but perhaps avoidable evils. So are the methods by which charters have been obtained and renewed; the method of "log-rolling" bills through the legislature; and other such corruption.[9]

An objection less easily disposed of is, that by the creation of any great moneyed power, means are afforded of controlling the fortunes of individuals, and of influencing the press and the political constituency. If these objections cannot be obviated, they are fatal to banking corporations. If, however, any means can be devised, either by causing a sufficient publicity of proceedings, or by granting charters for a short term, renewable on strict conditions, or by any other plan for establishing a true responsibility, of uniting the benefits of incorporated banks with republican principles, it seems as if it would be a great benefit to all parties in the community.

The difference of opinion which has made the most noise in the world, is about a National Bank.

It appears to have been contemplated, in the first instance, to place the currency of the United States under the control of the general government; according to the spirit of the provisions of the constitution, that Congress should have power "to coin money, regulate the value thereof, and of foreign coin:" but without affording to Congress any power to control the fortunes of individuals, as may be done by certain banking operations. The state of the colonial currency had been deplorable.[10] The object now was to substitute a uniform and substantial currency, instead of the false representatives which had been in use: and to put it out of the power of the States to alter the terms of contracts by taking advantage of the faults of the currency. Nobody would take the continental bills; and gold and silver were deficient. A national bank was the resource; and the old United States Bank was chartered in 1791; it being ascertained that its issues were based on real capital, and a strict watch being kept over its operations.

This bank was believed to be wanted for another purpose;--to watch over and control the State Banks. It was not the first institution of the kind in the United States. The Bank of North America had been chartered in 1781, under the authority of the Continental Congress: but by soon accepting a charter from the Legislature of Pennsylvania, it ceased to be a national, and afforded the precedent of a State Bank. New York and Massachusetts had soon State Banks also. They were prudently conducted; and their notes presently banished the coin. The power of Congress over the currency was gone. All that could be done now was for the National Bank to control the State Banks, and keep their issues within bounds, as well as it could.

Occasional disorders happened from the misconduct of country banks, prior to 1811. The renewal of the charter of the United States Bank was then refused. The government was pressed by the evils of war; and the check of the superintendence of the Bank being withdrawn, the local banks, out of New England, came to the agreement, (too senseless to be ever repeated,) to suspend specie payments. All issued what kind and quantity of paper pleased themselves, till above twice the amount of money needed was abroad; and the notes were in some States five, in others ten, in others twenty, below par. The New England people, meantime, used convertible paper only; and under the law which provides that all duties, imposts, and excises should be uniform throughout the States, were thus compelled to pay one tenth more to the revenue officers than the people of New York, who used the depreciated currency: and one-fifth more than the Baltimore merchants.

This state of things could not last. A national bank was again established, in 1816, for the purpose of controlling the local banks. Its charter was for twenty years, with a capital of 35,000,000 dollars, to which the federal government subscribed one fifth. Its notes were made receivable for any debt due to the United States.

Its purpose was presently answered. The local banks had, in three years, resumed cash payments. The management of the United States Bank, during the rest of its term, has been, upon the whole, prudent and moderate. That a power has not been abused is not, however, a reason for its continued exercise, if it be really unconstitutional. President Jackson thinks, and the majority thinks with him, that it is contrary to the spirit of the constitution, (as it is certainly unauthorised by its letter,) that any institution should have the power, unchecked for a long term of years, of affecting the affairs of individuals, from the further corners of Maine or Missouri, down to the shores of the Gulf of Mexico; of influencing elections; of biassing the press; and of acting strongly either with or against the administration. The majority considers, that if the United States Bank has great power for good, it has also great power for harm; and that the general government cannot be secure of working naturally in its limited functions, while this great power subsists, to be either its enemy or its ally.

This seems to be proved by the charges brought against the late Bank by President Jackson. Whether they are true or false, (and the gravest of them do not appear to have been substantiated,) they indicate that power is in the hands of a central institution, which no federal establishment ought to have, otherwise than by the express permission of the constitution.

As for President Jackson's mode of proceeding against the Bank,--it is an affair of merely temporary interest, unless he should be found to have exceeded the authority conferred on him by his office. He does seem to have done so, in one particular, at least. His first declaration against the renewal of the charter, was honest and manly. His re-election, after having made this avowal, was a sufficient evidence of the desire of the majority to extinguish the Bank. It was, no doubt, in reliance on the will of the majority, thus indicated, that the President removed the deposits in a peculiarly high-handed manner; and also exercised the veto, when the two Houses had passed a bill to renew the charter of the United States Bank.

With the last of these measures, no one has any right to quarrel. He exercised a constitutional power, according to his long-declared convictions. His sudden removal of the deposits is not to be so easily justified.

The President has the power of removing his Secretaries from office, and of appointing others, whose appointment must be sanctioned by the Senate. The Secretaries of State are enjoined by law to execute such orders as shall be imposed on them by the President of the United States:--all the Secretaries but the Secretary of the Treasury. In his case, no such specification is made; obviously because it would not be wise to put the whole power of the Treasury into the hands of the President. President Jackson, however, contrived to obtain this power by using with adroitness his other power of removal from office. Mr. Duane was appointed Secretary of the Treasury on the 29th of May, 1833; his predecessor having been offered a higher office. It is known that the predecessor had given his opinion in the cabinet against removing the Treasury deposits from the Bank; and that Mr. Duane was an acknowledged enemy of the Bank. On the 3rd of June, the President opened to the new Secretary his scheme of removing the deposits. Mr. Duane was opposed to the act, as being a violation of the government contract with the Bank. He refused to sign the necessary order. While he was still in office, on the 20th of September, the intended removal of the deposits was announced in the government newspaper. On the 23rd, Mr. Duane was dismissed from office; and Mr. Taney, who had previously promised to sign the order, was installed in the office. On the 26th, the official order for the removal of the deposits was given. No plea of impending danger to the national funds, if such could have been substantiated, could justify so high-handed a deed as this. No such plea has been substantiated; and the act remains open to strong censure.

Just before the expiration of its charter, the United States Bank accepted a charter from the Legislature of Pennsylvania. It remains to be seen what effects will arise from the operation of the most powerful State Bank which has yet existed.

The problem now is to keep a sound currency, in the absence of an institution, believed to be unconstitutional, but hitherto found the only means of establishing order and safety in this most important branch of economy. Here is a deficiency, which cannot but be the cause of much evil and perplexity. It must be supplied, either by increased knowledge and improved philosophy and practice among the people, or by an amendment of the Constitution. Meanwhile, it is only time and energy lost to insist upon the return to a mere metallic currency. Society cannot be set back to a condition which could dispense with so great an improvement as paper-money, with all its abuses, undoubtedly is.

The singular order which last year emanated from the Treasury, compelling the payments for the public lands to be made in specie, will not have the effect of making the people in love with a metallic currency. If this measure is intended to be an obstacle to the purchase of large quantities of land, or virtually to raise the price,--these are affairs with which the Treasury has nothing to do. If it is intended merely to compel cash payments, as far as the administration has power to do so, it seems a pity that those who undertake to meddle with the currency should not know better what they are about. The scarcity of money in the eastern States has been well nigh ruinous, while large amounts of specie have been accumulated in the west, where they are not wanted.

The mischief thus caused has been much increased by the injudicious method in which the deposits have been distributed among the States, according to the Deposit Bill of the session of 1836. The details of the extraordinary state of the money-market in America, last year, are too well known on both sides of the water, to need to be repeated here.

One principle stands out conspicuously from the history of the last few years: that no President or Secretary should be allowed the opportunity of "taking the responsibility" of meddling with the currency of the country: in other words, the taxation should be reduced, as soon as in equity and convenience it can be done, so as to bring down the revenue to a proportion with the wants of the government. If the general government is to have anything to do with the currency at all, it should be by such business being made a separate constitutional function. To let the Treasury overflow,--and leave its overflowings to be managed at the discretion of one public servant, removable by one other, is a policy as absurd as dangerous. The most obvious security lies, not in multiplying checks upon the officers, but in reducing the overflowings of the Treasury to the smallest possible amount. This is President Jackson's last recorded opinion on the subject. It appears worthy to be kept on record.