National banking examined

Front matter

Pieasc accept the accompanying copy of \onal Ba > com .

pliments of the author. It is the only complete review of the system extant, and is sent honing it may he useful as a hand-book of finance. The author does not expect it to he the equivalent of valuable space m your paper; though any no¬ tice which your interest in the subject may prompt you to give, will be aovreciated.

National Banking Examined.

I. The Practical Workings Of National Banking

“The object of these pages is to protest against the doctrines and con¬ clusions of those who proclaim our method of banking and currency, to be the best in the world .”—Currency or Money. Samuel Hooper, Boston , 18pp.

The advocates of the present national banking system, make for it the sweeping claim that it is the best in the world. Among them we find names distinguished in the field of'financial thought, as well as the other fields not less important. But the fact that all the claims made for this system were made for previous systems of federal banking in their day, and found to be false, will make the careful and unprejudiced observer slow to accept the pretensions of this one. And not alone for federal banking has this claim been made. In Samuel Hooper’s pamphlet on .“ Currency or Money,” (Boston, 1855), he shows that the state banking system of that day, made the same claim to perfection that the present national system now makes. This claim is no doubt made for every-banking system as it succeeds the last one. When the United States Bank was in operation, large sums were paid to the press by it for aid in its de¬ fense against the Democrats. To what extent this is true of the present system is not now publicly known; but it is easy to get a publisher for anything written in defense of it, and almost imposs¬ ible to get one for anything opposed to it. Among its principal defenders, are the comptroller of the currency, John J. Knox, Ex-Secretary of the Treasury, Hugh McCul¬ loch, George Walker, the distinguished financialist, M. L. Scudder Jr., of a “league” in the northwest, devoted to proving that no other money but gold and national notes are “honest.” But however the others manage about the expense of their publica¬ tions, there must be serene satisfaction in the mind of the comp-

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troller, as he thinks that the people, whom he is trying to convert to federalism in banking, are paying him whilst he writes, and pay also for the printing and distributing of his arguments. Walker gives the chief motive of a political party and all persons, in at¬ tacking the national system as “jealousy of the banks themselves, and of the money they have honorably accumulated.” Whether it is jealousy or some other motive that prompts him to “compass the overthrow” of the older State systems by making the national “ex¬ clusive of all others,” he fails to inform us. The great banking interests of the Atlantic cities that bitterly opposed the system at its beginning, now resist any change in it, chiefly because bankers dislike interruptions in the established order.

In the International Review for March, 1879, Walker says Chase “builded better than he knew,” for his system of banking has thrown “around the business such safeguards as had hereto¬ fore existed only to a very limited extent.” He further depicts the unsatisfactory condition of the “heterogeneous sytem of state banks which Chase’s National Bank Act superseded.” Among the safeguards thrown around banking, the examination by government officials is generally considered an important one. If the comp¬ troller would show, in his report on the failed national banks, how long before each failure there had been an examination and what the report was, ' it would be a ^est of what this law has accom¬ plished. I suggested this to the comptroller before his last report, but he thinks it would be no test of the system, but only of the faith¬ fulness of certain examiners. Undoubtedly examination is over¬ rated in importance for the simple reason that the gist of any bank’s condition lies in the quality of its discounts, and it would be impracticable to get an examiner who, were the portfolio put in his hands, would be much the wiser. In estimating the value of the custom of hiring an official to watch our banker we generally overlook the fact that there is a tendency to cease to watch him ourselves and leave it all to the hired watchman who in turn needs a watchman. Though publications and examinations may be of value, they are apt to be rated at a higher value than the facts warrant or the case permits them to possess. If Jay Cooke & Co., had not had charters for any bank, but had been private bankers, never examined or publishing statements, experienced business men would have earlier suspected them, and made others suspect them to be undertaking too much when they began the Northern

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Pacific Road. Examinations and reports tended to lull every one into security, and thus enabled them to involve more persons in their fall, and create a greater alarm than could otherwise have been done. For some time before failing, a country national bank known to the writer, was paying 15% interest on its time certificates in a state where the outside legal rate is 10%. Dis¬ graceful failures have occurred under this system, equalling the worst under any other. Yet from their published statements, no one could see anything wrong. The weak point in this part of the system is that these banks are all “pets” with the comptroller. He is so ardent an advocate of the system that he is the last per¬ son one may look to for the exposure of weakness or wickedness in the system after examination has discovered them. The law in¬ tended him for a servant of the people to watch the banks, but he is a servant of the banks to defend them from the people. He is a permanent “whitewashing committee” for them. When Jackson and Benton destroyed the last lot of federal banks before these, ''what has been before thought sound was found to be “a festering mass of rottenness.” In his letter proposing the establishment of a national bank as the sole source of issue of paper money, Alex¬ ander Hamilton, of New York, says that the Bank Commissioners of that State, just before the suspension of 1837, reported tri¬ umphantly that everything was perfectly sound. Nobody now de¬ nies that Biddle wilfully brought distress on the country when the war between himself and Jackson was in progress. The comp¬ troller is lest likely to injure the country in such way than by per¬ mitting it to be honey-combed with institutions not properly based and conducted. Fessenden said, (April 26, 1864), “ * *

* * * * During a recess of congress the great in¬

terests of the community might be left at the mercy of the comp¬ troller of the currency.” He thought the president should have the absolute power of removal. The law as it now stands is as it was when Fessenden made this objection. Had it been changed as he desired, it would have left the country at the mercy of the president. He said also of the comptroller, “He will wield an immense power in the country over all these banks with this accu¬ mulated capital, and he could in the course of a very short time, if he were disposed to do so, produce the most disastrous effects upon the currency of the country by his own motion.” The comptroller at present in office can not conceal his impatience at the existence of state banks not entirely in his control. He wishes the banking interest of the country to have but one neck and he will halter it and lead it whithersoever he will. The security which we have against his abuse of the power is the same as that of the French against their former tyrant rulers : “The king is too gracious to abuse his power over us.”

The comptroller even tries to show that the system is indis¬ pensable if we desire banking statistics. The issues of state banks will always be recorded in the states in some form. Statisticians, commercial agencies and others, will always collect the facts and publish them, along with other commercial information, for sale. We will get them as well, therefore, without a national comptrol¬ ler of the currency, as with him, aside from the objection that it is not the business of the federal government to furnish this infor¬ mation. We get the more important statistics of our annual pro¬ ducts from other than federal sources. With his facilities for gath¬ ering statistics, why has he never shown how much of the capital now in the national system was already employed in banking and merely changed over to this system from the various state systems; and how much of it is new? Perhaps he does not want it known that it is merely the state bank capital in a new dress; that the state banks of which he and other advocates “think scorn,” gave the national system nearly all the strength and respectability it has, and could, by withdrawing, abolish it.

The enormous strength of the sound State banks at the begin¬ ning of the war was too thoroughly tested in the assistance they gave in taking loans, to be changed or underrated by the fact that they were not under one system. The national banks hold but little over half the amount of deposits held by the non-nationals. The total deposits in the latter are nearly six times as great as their total capital, whilst the deposits in the nationals are less than oneand-two-thirds times their capital. The people, for whose safety we are told that $337,000,000 in national notes have been secured, deliberately- deposit in state banking institutions and with private bankers $1,180,000,000 with¬ out security. Taking the notes issued by the institutions that Walker informs them have had special safeguards thrown around them, the people deposit the entire volume and nearly three times as much more in other funds in banks that are governed only by their own state legislatures. Surely until the law suppresses all

NATIONAL BANKING EXAMINED.

and forces the people to deposit in the less-trusted national banks, the national bank act must be considered incomplete. This preference of depositors for state banking institutions is not without a sound reason. If by an amendment,to the constitu¬ tion or a decision of the court, the government were to lose the power to create legal tender paper, it might find itself with ninety per cent, of the bonded debt, or about fifteen hundred million of dollars in national notes payable at the treasury in coin on demand. All of the banks in the country have suspended before; it is not improbable that all the national banks after issuing all the currency possible—ninety per cent, of the bonded debt—will suspend. The government could scarcely fail to be obliged to-sell the bonds at a sacrifice, and would be a preferred creditor and would make up its loss out of the capital and other assets of the banks, leaving the depositors whatever might be left. It is indeed strange that one should deposit in a national bank under these circumstances where 'there is another kind equally $ good, unless he has confidence in it irrespective of the dangers to the system and all connected with it.

Sherman pointed this out when the bill was first in the Senate. He said the bill holder ‘ ‘ has not only a lien on the stock and bonds deposited here, but he has a prior lien on everything owned by the bank. * * * The United States, in any event, redeems the note, seizes upon the property, and has a prior lien on all the property' of the bank.” Should such a case ever occur the same events that cause it will destroy some or all of the markets on which the govern¬ ment depends for the sale of the bonds, from the proceeds of which it expects to redeem the notes. And better bonds than those now deposited once sold for forty cents on the dollar in coin, and these may yet do so. For the demand may come when war is imminent or is in progress, or under equally embarrassing circumstances. . True, the law requires the banks to deposit additional security if the bonds decline so much as to wipe out the ten per cent, margin; but this during the times of paper legal tenders is a farce, and after they shall have passed away will be impossible of fulfillment when most urgently required, and if enforced will be in favor of note holders to the injury of depositors.

Usually suspension is no misfortune to the national banks. Those who before got notes from them are glad to get certified checks at such times. In 1873, when the volume of national notes was less than the legal tender notes they were payable in,

NATIONAL BANKING EXAMINED.

national banks quit paying anybody anything but certified checks. Gold has quit coming to us, greenbacks are to be retired and the increase of national notes now occurring will continue. The re¬ sult may easily be foreseen.

Hugh McCulloch considers “the essence” of the national system “ a circulation perfectly secured and of uniform value in all parts of the United States.” It is scarcely proper to so refer to it inasmuch as a direct issue by the government possesses precisely the same qualities. A characteristic of the national system is keeping the notes at par on a one-ninth basis of coin. We can do more inflating, and get more prudent persons to forsake the true principles of finance on this plan than any other ever devised.

Walker says the idea of any Section of the country having a sound local currency under State laws “is a stupid fallacy.” Its supporters have such company as Nathan Appleton, one of whose sayings has stood as a motto on the title page of the Bankers’ Magazine as long as any young bankers can remember, and was made before some of us were born. ‘ ‘ Every centre of trade can establish and maintain a sound currency for itself, if it choose to do so. * * * * This was fully proved in Boston, and the circle of circulation controlled by it, during the suspension of 1814-15 -16.” (Appleton’s Currency and Banking, p. 23, 3d edition, 1856.) Appleton was a believer in the advantages of a national bank. The Pacific states maintained a local circulation of coin and would no doubt have had along with it a local paper currency had not federal taxation prevented it.

Banking is a slow, safe, conservative business, when properly conducted. It is, for this reason, not rushed into readily by speculative and adventurous persons. To get men to go into the national system extraordinary inducements had to be offered, or extraordinary pressure had to be put on the men in other systems to drive them out of them. Either is a prima facie condemnation of the national system. If justifiable on the ground of emerg¬ ency, it should be reversed when that has passed away. When this system was under debate in congress in 1863, Geo. S. Coe made the pertinent objection that it was calculated to bring adven¬ turers into the business, a fear since seen to have been well-founded, and an invariable effect of special privileges in banking.

During the long suspension of the Bank of England some of the,soundest financialists there fell into Jhe error of thinking that

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there could be no excess in the issue of the suspended notes as long as the discount of mercantile bills was confined to undoubt¬ edly. sound bills, growing out of real commercial transactions and payable at a fixed short period. This error was fully exposed in the celebrated “Bullion Report” of a committee of the House of Commons. The chief fallacy was in ignoring the effect of the ad¬ ditions to the volume of the circulating medium by such issues. A similar error grows out of our national system. The notes are considered good whether many or few, from soujid banks or broken ones, so the natural tendency is to think that the whole debt might as well be in circulating notes as in any other shape. So the banks issue with respect to ultimate soundness, not with re¬ spect to present convertibility. And when people get excited and want the money they cool them off with certified checks.

The security feature of the national bank currency is drolly misunderstood. A prominent metropolitan editor dwelt on this feature in conversation lately, yet every national bank note he had was in a bank as a deposit. So if the bank failed, the fact that the notes he deposited were well secured would matter but little to him; and if the notes were not secured and the bank issuing it failed, it could not be charged back to him by his depository bank. The only interest he had was the general one of not wanting his bank to be weakened by losing on the bills of other banks. Many a man congratulates himself that the national notes he is taking in for sales are so well secured: and before night he has deposited them with a private banker or a state bank; or in a national bank where, as a deposit, he has no security for it. Those chiefly bene¬ fited by the security of the national bank notes are the banks and bankers : they are protected against each other. Of course the se¬ curity feature is valuable, but not in the way generally supposed.

Some who are giving up the federal paper money idea, who agree that if gold and silver bullion were freely coined on the de¬ mands of all persons, we would have enough constitutional money and could dispense with all paper circulation except coin certifi¬ cates, still think that the coin should be deposited with the treas¬ urer at Washington, or at some sub-treasury, and the certificates issued by the government. They know that funds are transferred best by bills of exchange and that these bills are paid by shipments of commodities, but think that the holders of the certificates will be secured from loss if the government will store their coin, and

NATIONAL BANKING EXAMINED.

subject to loss if the banks store it. But when they get the govern¬ ment’s certificates they store them in bank. It is one of the most remarkable and widespread hallucinations of which there is .any record. The banks should store the coin and give its owners cer¬ tificates fitted for circulation. The legislatures of the states could pass such laws as would make it the safest manner of holding it; aside from the lack of power in the federal government to ware¬ house the coin solely for the convenience of its owners.

Country national banks do not pay any attention to redemp¬ tion at all, but act as if their notes were in fact what they have so long been—money. Tl^ey care little for having legal tenders on hand, and as for coin they scarcely consider it. In the statements for 1879, one bank has nearly $90,000 in circulation; $187.50 in specie; $1,500 in legal tenders. Another has $447,400 circulation and $1,611.60 specie; legal tenders $ 00. These are but speci¬ mens of what the statements contain.

Nothing in this system has been more boasted of than its uni¬ formity. Yet the law made a distinction in favor of the National Bank of Commerce, because it was the largest in the country. Its stockholders are not doubly liable as is the case with other national banks. When this question was up, Grimes of Iowa, said: “This idea of making a distinction in behalf of one great moneyed cor¬ poration of the country when we are establishing what its friends call a “uniform system of banking,” is so exceedingly abhorrent to my sense of fair play, of justice, and equity among the differ¬ ent corporations and citizens of the country that I think it incum¬ bent on me to ask for the yeas and nays,” etc. The desire to make these banks uniform was so great that they wanted them subjected only to federal taxation. Fessenden said : “this idea of making * * a sort of Procrustean bed for everything that is done by the United States government * * is perfectly preposterous.” Praise is lavished on this system because its notes are uniform in value. For this M. de Tocqueville praised the notes of a for¬ mer federal bank. But national notes were uniformly worth thirtyfive or forty cents on the dollar when the notes of some of the state banks they superseded were worth at the same time par in coin. The continental money was uniform in value until it be¬ came uniformly valueless.

The only point on which uniformity is useful, is uniform par¬ ity with coin. Who cares anything about the uniformity of bills

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of exchange except that they be uniformly paid on presentation ? “It is a curious fact, that the general currency of the United States Bank notes, in consequence of their being receivable every¬ where in payment to the government, was considered a great evil, both by the bank and the community.” (Cy. & Bk’g. Nathan Appleton, Boston, 1841.) But a gentleman of much experience as a state and national banker, assures me that this claim is not true, that national notes when sent to New York correspondents in large quantities are never credited at par, and usually not cred¬ ited at all until converted.

The charge of heterogeneity againt the ante-bellum, banking business of the country is in reality in its favor. A change from the homogeneous to the heterogeneous accompanies every step in the evolution of life. To prescribe a uniform plan of banking for the lumber regions of Maine, the manufacturing districts of Mas¬ sachusetts, the importing interests of New York, the fruit interests' of Delaware, the tobacco raisers of Virginia and Carolina, the cott on districts of Mississippi, the sugar lands of Louisiana, the stock breeders of Missouri, Kansas and Texas, the wheat growers of Iowa and Illinois, the miners of the Rocky Mountains, and the railroad and other corporations of the entire community, is the acme of absurdity. The one point of uniformity necessary—that the medium of exchange possess uniform and steady value—is im¬ possible of realization for any great length of time and when most needed under this system.

In the “heterogeneous system of banks” before the war, the “wild cat” banks became noted. They issued notes that were to be redeemed out of the profits made from using them. This sys¬ tem is now engrafted on the national and is found no longer in the West, but in New York City. When the banks have used all of their money and their dealers call for more, they create it by cer¬ tifying checks. .The great point of superiority of the modern over the ancient, of the cultivated over the rude, is not calling things by their right names. In a month the city cashier can manufacture as much wild cat paper as all the western states ever made in their whole history. The wild cat system is forever dead in the west, but it has been put in full blast in the progressive east by a bank¬ ing system whose praises the presses of the government have printed for us ad nauseam. The comptroller scolds and threatens, and when the demand subsides the wild cat departments are shut

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down until another demand arises. “He knows that the charter of every New York City bank was forfeited last September;” said Hon. W. D. Kelly, of the comptroller in April, 1874. “He knows that when they all transgress, and the enforcement of the penalty would break up the whole system, he can not even threat¬ en to punish them but must palter to their iniquity and lawless¬ ness,” he continued. Another vice that grew out of the abund¬ ance of paper created by the national banks, the antipodes of this one was “lo.cking up’’ money. The operators borrowed the notes and left them as security for the loans themselves, thus making a tight money market and forcing prices down. This is now forbidden by law; and that the system that caused the vice was used to cure it, is considered by its friends a signal example of its perfection.

One of the most important claims made for this system is that by providing a currency of uniform value in all parts of the coun¬ try, it prevents loss on exchange to which the diverse values of state bank notes formerly subjected us. Those who make this claim appear not to understand what the term “exchange” covers. Comptroller Knox, in his report for December, 1878, estimates the amount of exchange sold annually at four thousand millions of dollars. The symbols known as bills of exchange only par¬ tially register the amount of exchanging done, and their cost is but a part of the cost of exchanging. Some money of course is shipped by express, but the sale of four thousand million dollars of exchange does not mean the shipment back and forth of the entire volume of our “homogeneous” national bank currency an¬ nually many times, to meet drafts. It means the exchange of so much raw produce for so much manufactured goods. The cost of exchange is properly the cost of exchanging the things, not that of transferring the symbols. Of the circumstances going to make up the proper cost of exchanging, the most important is the means of transporting the things to be exchanged. In i860, and before, when produce went forward from the South and West at a much greater expense of money, and especially of time that represented interest on money at high rates, and when manufactured goods came back under the same conditions, the actual cost of excnanging was very much greater than at present. Therefore we are in¬ debted to our increased facilities for transportation and communi¬ cation, for reduction in the proper cost of exchange, and not to

NATIONAL BANKING EXAMINED.

any banking system. The question is narrowed down then to this point: Did uniformity in the value of the currency save us from loss in exchanging commodities, to which diversity of value in former state bank currencies subjected us? Does it now? Will it in the future ? Labor requires capital to support it while operating. The general practice of producers of raw material is to buy goods to a greater or less extent on credit, and pay with next crop. The great masses of our people are producers of raw material and con¬ sumers of the manufactured goods of foreigners, or of a small class of home manufacturers at a higher rate than foreigners ask. By buying their goods on credit and paying for them after raising a crop, they have been steadily realizing losses as commodities have steadily declined in price. They bought high and sold low for twelve years—losing on exchange—chiefly on account of the undeterminable value of the medium of exchange, the notes of the government and the banks. The appreciation in the market value of the currency from 1873 t0 l &79> representing the loss on com¬ modities, is 15%, or 2 >% a year. In Mr. Fawcett’s “Handbook of Finance,” he says: “From 1867 to 1872 there had been an average decline in the currency prices of all leading commodities in New York of from 30 to 35%. This, it is true, was mainly the effect of the appreciation of the paper currency, * * * but I

think not wholly.” (p. 132). The loss from 1874 to 1879 * s X S% on four thousand millions, or six hundred millions. From 1867 to 1872, by Mr. Fawcett’s lowest figure, it is one billion two hun¬ dred millions. The total loss on exchange during the time the na¬ tional notes have been circulating, then, is about two billions of dollars. Thus the identical agency that we are told has saved us from loss on exchange, has cost us annually four times as much as the comptroller says the loss would now be if state bank circula¬ tion were restored.

But it is not in agricultural products alone that we have been thus steadily losing through years. A furniture manufacturer fur¬ nished me, unsought, an example. He said that for years he had been turning out furniture that when put on sale, would not invoice enough at market prices, to cover the cost of material and labor. This has been to a great extent true of all the other branches of manufacturing. And the annual value of our manufactures is about four thousand millions. It is probable that the loss on ex¬ change caused by this currency was nearer four billions or eight

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times as much annually as the comptroller says the loss on exchange would now be if state bank currency were restored.

Some one may say that the loss would have been the same if there had been only greenbacks and no national notes in circula¬ tion. If we grant him this, he is no better off; for the claim on the part of the national bank advocates is that their system has saved so many millions annually in exchange.

Under our present arrangement a redemption fund of one-third keeps greenbacks at par, and a similar fund of greenbacks will keep the national notes at par, so that one-ninth becomes a suf¬ ficient coin basis for the latter. If $115,000,000 in coin is a sufficient reserve to keep $346,000,000 in greenbacks at par, then that amount of greenbacks will keep $1,038,000,'000 national cur¬ rency at par. "Vyhether there might not be another kind of notes redeemable in national notes, of which three billions could be kept at par on a basis of one-third national note reserve fund and the entire card-castle rest on the basis of $115,000,000 in coin, is an inviting question for inflationists.