CHAPTER XI. EXAMINATION OF THE COMMON OPINION THAT THE ESTABLISHMENT OF BANKS IN THE WESTERN STATES, UPON EASTERN CAPITAL, IS BENEFICIAL TO THOSE STATES.

IT is an opinion very frequently expressed, that the establishment of banks in the western and southwestern country, has been a great source of prosperity to the cities and towns where they have been located as evinced by the improvements to which they have given rise, and by the commercial and manufacturing activity that has been displayed. Cincinnati, Louisville, Nashville, Natchez, Vicksburg, and numerous other places, it is said, owe a large share of their prosperity to the establishment of banks; and as these have all been banks of circulation, it is concluded that therefore banks of circulation must have powers to create national wealth, which I have denied to them. Let us examine this doctrine.

It has been shown in a former chapter, that nothing but capital, that is, something possessing an intrinsic value, can possibly be the means of setting industry in motion, and that banks have not the power of creating such capital by a mere issue of promissory notes. It may, then, fairly be concluded, that as far as any real prosperity has been ascribed to the circulating principle of the banks established in the places that have been mentioned, the position is fallacious, and without a shadow of foundation. But, at the same time, I am prepared to admit, that as far as the capitals of the banks referred to have been subscribed by capitalists residing in the Atlantic cities, those cities and towns have reaped all the benefits resulting from the borrowing of a foreign capital, whatever they may be. The simple fact of that capital’s being nominally what is called “a money capital,” is of no sort of consequence in the estimate of the benefits; for, in truth, although subscribed in money, it was never in the form of coin in the actual possession of the western banks, but a fund in the Atlantic cities, drawn upon and sold to the western merchants as a remittance to pay up their existing debts, or to purchase new supplies of goods. It was thus a capital subscribed, nominally in money, but really paid up in dry-goods, hardware, and groceries; and the effect, therefore, upon the prosperity of the western towns, was precisely the same as that of obtaining from individual merchants, or in any other way upon credit, an equal amount of merchandise, with this difference, that the credit might not cost as much through the process of a bank, as if obtained through a purchase of goods in the ordinary way.

This difference in the cost of the credit, however, is all the benefit that the western cities and towns can have reaped from borrowing foreign capital through bank charters, rather than through the ordinary channels of purchasing goods on credit. What it may have amounted to, it is not easy to ascertain; but as a set off to it, it may very fairly be assumed, that in the scramble for discounts made on the first opening of the banks, the loans of capital and credit were not as judiciously made for the general interests of the country, as sales of merchandise would have been by the eastern merchants, as is shown by the fact that immense sums were loaned to planters who embarked in speculations in lands and slaves, and to merchants who embarked in shipments of cotton, and who ultimately became embarrassed or ruined by these operations. Every one remembers that the southwestern banks were the last to resume specie payments after the late suspension; and it is well known to many, that they were only enabled to do it when they did, by borrowing large sums from the eastern cities, or by the emission of post notes payable at distant periods with which they absorbed a part of their immediate liabilities. If any stronger proof were wanted of injudicious and improvident loans on the part of many of those banks, it may perhaps be found in the second failure that has taken place with all of them since their resumption in January, 1839, and in the expression of public opinion manifested on the stock exchanges of New York and Philadelphia at a recent period, which places the stocks of all of them below par, and of some of them very considerably below it.* If these facts be conclusive as to indiscreet and improvident loans, all the mischief which I have in other parts of this work traced to the same cause in other places, must be equally predicated of the western and southwestern banks; and it will not perhaps be difficult for the reader to admit, that all the benefit which the western and southwestern states have derived from the establishment amongst them of banks constructed upon foreign capital over and above the benefits which those states would have derived from their merchants buying and selling an equal amount of foreign goods on credit, has been more than counterbalanced by the evils resulting from incautious loans of capital and credit.