CHAPTER VII. ON THE STRICT CONVERTIBILITY OF BANK NOTES AND CREDITS.

BUT it may be asked, how are banks to ascertain the precise limits beyond which they cannot extend their issues without endangering their solvency and depreciating the currency, and of course injuring the public? And what guarantee has the public, who, from the nature of things, can know nothing of the state of their issues at all times, that their confidence will not be misplaced?

The answer to this question is not easily to be arrived at. In the various investigations before the British House of Commons in reference to the Bank of England, rules for prudent issues have been laid down by different directors, with a variety which showed that all did not possess a scientific acquaintance with the principles of banking. In the management of the numerous banks of the United States, an inexcusable ignorance of first principles has been repeatedly manifested, and hence, we have seen repeated expansions and contractions of a highly prejudicial nature. These expansions and contractions, however, with the fluctuations in prices necessarily accompanying them, would exist only to a limited extent, if there were a real bona fide convertibility; and I wish it to be distinctly understood that all my remarks favoring banks of circulation, are founded, upon the supposition of such convertibility.

How then is absolute convertibility to be attained? I answer, by the joint co-operation of the banks, of the public, and of the legislatures.

The duties which the banks have to perform are, first, to deal honestly with their creditors, by keeping themselves in a condition at all times to meet their liabilities, and by promptly paying on demand, in acceptable coin, their notes or deposites for any amount that may be called for, without the slightest intimation by the looks, words, or deeds of their officers, that they would rather not pay, and consequently, by despising those miserable and discreditable expedients so frequently resorted to by banks on the eve of insolvency, of gaining time by a useless delay in counting out small coins, or in weighing gold pieces; secondly, by scrupulously avoiding to throw obstructions in the way of a free exportation of coin, either by refusing facilities for the packing up at the bank of sums however large, or by disqualifying the exporters from their equal rights with others when applying for discounts; thirdly, by calling upon each other for the payment of daily balances in coin, in order that each bank may be restricted within its proper sphere; and, fourthly, by confining themselves to the legitimate pursuits of banking, and by carefully watching the political horizon, to see that no event like war, civil commotion, or governmental interference with the currency, is likely to find them unprepared.

An honest observance of these rules would of itself establish true convertibility, but unfortunately experience has given too much reason to fear, that the moral sense of corporations cannot be relied upon for the protection of the public. The ignorance of some, the speculative avarice of others, the favoritism incident to most, and the desire common to all, to amass large profits, are constantly operating to effect an expansion of the currency to the utmost limits of tension; and however prudently and wisely conducted may be many of these institutions, their influence and example are lost upon the rest, and when a calamity befalls the country by a general stoppage of payments, they are made to share in the common catastrophe.

The duties which the public have to perform, as a check upon this perpetual tendency to over-issue, are incumbent on every citizen; and he who withholds his co-operation, when he has a motive to act, becomes a participator in the wrong. They are, simply, for every man who wishes to convert bank notes or deposites into coin, either for the purpose of convenience or exportation, and whether the amount be large or small, to make his demand without being influenced by fear, favor, or affection, or through any false or mistaken delicacy towards the directors of banks, or their debtors who might in consequence thereof be called upon for an earlier reimbursement. Here, again, unfortunately, experience demonstrates, that the independence and moral firmness of most merchants is not proof against the influences which may be brought to bear against them. On the one hand, they find their discounts interfered with, and their commercial operations crippled; whilst on the other, they discover that a clamor is raised against them by those debtors to the banks who purchase commodities from them, as soon as they feel the pressure occasioned by a diminution of discounts, consequent upon a heavy demand for specie.*

The only true resort, therefore, that can be appealed to for absolute convertibility is legislation. But how is this legislation to be expressed? By forfeiting the charters of banks that do not pay their notes. The legislature of New York in May, 1837, absolved its bank’s from this penalty for one year. By imposing a penalty of twelve or twenty-four per cent, per annum, upon notes and deposites not paid in coin. Such provisions were wholly inoperative in those states where they prevailed, during the late general suspension, by the evasion of the banks, and by popular clamor raised against individuals who demanded their rights, and cannot be relied upon, either to prevent a general stoppage, or to enforce a resumption with promptness. The true and only answer is, by establishing individual liability, such as that which exists with all the joint-stock banks of England, and all the private banks of that country as well as of Europe.*

With such a convertibility as this would accomplish, we should run comparatively very little risk of expansions and their consequent contractions, or of an alternate plenty and scarcity of money. The overtrading of each particular bank would be checked by the prudent regard to self-interest which would operate upon its managers; and if recklessness should characterise the conduct of one, or a dozen, or a hundred banks, it or they would simply fail, like individual traders, and make an assignment of their property, without producing the catastrophe of a general suspension of specie payments. To prevent the failure of banks altogether is impossible. The most that can be done, is to prevent a general stoppage.

But in laying down this proposition, I am far from imagining the present possibility of its adoption in the United States. The principle of limited liability by acts of incorporation, and by laws authorising limited partnerships, is too deeply rooted in our system to be now eradicated ; and as I believe the most practicable scheme of reform to which legislation can be applied at this day, is to be found in the policy of the New York general banking law, I will in a future chapter give my reasons for believing that plan to be better calculated, if made general throughout the Union, to give stability to the currency, than any other that would be likely to meet a general acceptance.