SPECIE BASIS FOR BANKS: ONE THIRD OF THE AMOUNT OF LIABILITIES
THE LOWEST SAFE PROPORTION: SPEECH OF MR. BENTON ON THE
RECHARTER OF THE DISTRICT BANKS.
This is a point of great moment--one on which the public mind
has not been sufficiently awakened in this country, though well
understood and duly valued in England. The charters of banks in the
United States are usually drawn on this principle, that a certain
proportion of the capital, and sometimes the whole of it, shall be
paid up in gold or silver before the charter shall take effect.
This is the usual provision, without any obligation on the bank to
retain any part of this specie after it gets into operation; and
this provision has too often proved to be illusory and deceptive.
In many cases, the banks have borrowed the requisite amount for a
day, and then returned it; in many other cases, the proportion of
specie, though paid up in good faith, is immediately lent out, or
parted with. The result to the public is about the same in both
cases; the bank has little or no specie, and its place is supplied
by the notes of other banks. The great vice of the banking system in
the United States is in banking upon paper--upon the paper of each
other--and treating this paper as cash. This may be safe among the
banks themselves; it may enable them to settle with one another, and
to liquidate reciprocal balances; but to the public it is nothing.
In the event of a run upon a bank, or a general run upon all banks,
it is specie, and not paper, that is wanted. It is specie, and not
paper, which the public want, and must have.
The motion of the senator from Pennsylvania [Mr. BUCHANAN] is
intended to remedy this vice in these District banks; it is
intended to impose an obligation on these banks to keep in their
vaults a quantum of specie bearing a certain proportion to the
amount of their immediate liabilities in circulation and deposits.
The gentleman's motion is well intended, but it is defective in
two particulars: first, in requiring the proportion to be the
one-fourth, instead of the one-third, and next, in making it apply
to the private deposits only. The true proportion is one-third, and
this to apply to all the circulation and deposits, except those
which are special. This proportion has been fixed for a hundred
years at the Bank of England; and just so often as that bank has
fallen below this proportion, mischief has occurred. This is the
sworn opinion of the present Governor of the Bank of England, and of
the directors of that institution. Before Lord Althorpe's committee
in 1832, Mr. Horsley Palmer, the Governor of the Bank, testified in
these words:
"'The average proportion, as already observed, of coin and
bullion which the bank thinks it prudent to keep on hand, is at
the rate of a third of the total amount of all her liabilities,
including deposits as well as issues.' Mr. George Ward Norman,
a director of the bank, states the same thing in a different
form of words. He says: 'For a full state of the circulation
and the deposits, say twenty-one millions of notes and six
millions of deposits, making in the whole twenty-seven millions
of liabilities, the proper sum in coin and bullion for the
bank to retain is nine millions.' Thus, the average proportion
of one-third between the specie on hand and the circulation
and deposits, must be considered as an established principle
at that bank, which is quite the largest, and amongst the
oldest--probably, the very oldest bank of circulation in the
world."
The Bank of England is not merely required to keep on hand,
in bullion, the one-third of its immediate liabilities; it is
bound also to let the country see that it has, or has not, that
proportion on hand. By an act of the third year of William IV., it
is required to make quarterly publications of the average of the
weekly liabilities of the bank, that the public may see whenever
it descends below the point of safety. Here is the last of these
publications, which is a full exemplification of the rule and the
policy which now governs that bank:
Quarterly average of the weekly liabilities and assets of the
Bank of England, from the 12th December, 1837, to the 6th of
March, 1838, both inclusive, published pursuant to the act 3 and
William IV., cap. 98:
Liabilities. Assets.
Circulation, £18,600,000 Securities, £22,792,900
Deposits, 11,535,000 Bullion, 10,015,000
----------- -----------
£30,135,000 £30,807,000
_London, March 12._
According to this statement, the Bank of England is now safe; and,
accordingly, we see that she is acting upon the principle of having
bullion enough, for she is shipping gold to the United States.
The proportion in England is one-third. The bank relies upon its
debts and other resources for the other two-thirds, in the event
of a run upon it. This is the rule in that bank which has more
resources than any other bank in the world; which is situated in
the moneyed metropolis of the world--the richest merchants its
debtors, friends and customers--and the Government of England its
debtor and backer, and always ready to sustain it with exchequer
bills, and with every exertion of its credit and means. Such a bank,
so situated and so aided, still deems it necessary to its safety
to keep in hand always the one-third in bullion of the amount of
its immediate liabilities. Now, if the proportion of one-third is
necessary to the safety of such a bank, with such resources, how is
it possible for our banks, with their meagre resources and small
array of friends, to be safe with a less proportion?
This is the rule at the Bank of England, and just as often as it has
been departed from, the danger of that departure has been proved.
It was departed from in 1797, when the proportion sunk to the
one-seventh; and what was the result? The stoppage of the banks, and
of all the banks in England, and a suspension of specie payments
for six-and-twenty years! It was departed from again about a year
ago, when the proportion sunk to one-eighth nearly; and what was the
result? A death struggle between the paper systems of England and
the United States, in which our system was sacrificed to save hers.
Her system was saved from explosion! but at what cost?--at what cost
to us, and to herself?--to us a general stoppage of all the banks
for twelve months; to the English, a general stagnation of business,
decline of manufactures, and of commerce, much individual distress,
and a loss of two millions sterling of revenue to the Crown. The
proportion of one-third may then be assumed as the point of safety
in the Bank of England; less than that proportion cannot be safe
in the United States. Yet the senator from Pennsylvania proposes
less--he proposes the one-fourth; and proposes it, not because
he feels it to be the right proportion, but from some feeling of
indulgence or forbearance to this poor District. Now, I think that
this is a case in which kind feelings can have no place, and that
the point in question is one upon which there can be no compromise.
A bank is a bank, whether made in a district or a State; and a bank
ought to be safe, whether the stockholders be rich or poor. Safety
is the point aimed at, and nothing unsafe should be tolerated.
There should be no giving and taking below the point of safety.
Experienced men fix upon the one-third as the safe proportion; we
should not, therefore, take a less proportion. Would the gentleman
ask to let the water in the boiler of a steamboat sink one inch
lower, when the experienced captain informed him that it had already
sunk as low as it was safe to go? Certainly not. So of these banks.
One-third is the point of safety; let us not tamper with danger by
descending to the one-fourth.
When a bank stops payment, the first thing we see is an exposition
of its means, and a declaration of ultimate ability to pay all
its debts. This is nothing to the holders of its notes. Immediate
ability is the only ability that is of any avail to them. The fright
of some, and the necessity of others, compel them to part with their
notes. Cool, sagacious capitalists can look to ultimate ability,
and buy up the notes from the necessitous and the alarmed. To them
ultimate ability is sufficient; to the community it is nothing.
It is, therefore, for the benefit of the community that the banks
should be required to keep always on hand the one-third of their
circulation and deposits; they are then trusted for two-thirds, and
this is carrying credit far enough. If pressed by a run, it is as
much as a bank can do to make up the other two-thirds out of the
debts due to her. Three to one is credit enough, and it is profit
enough. If a bank draws interest upon three dollars when it has but
one, this is eighteen per cent., and ought to content her. A citizen
cannot lend his money for more than six per cent., and cannot the
banks be contented with eighteen? Must they insist upon issuing four
dollars, or even five, upon one, so as to draw twenty-four or thirty
per cent.; and thus, after paying their officers vast salaries, and
accommodating friends with loans on easy terms, still make enough
out of the business community to cover all expenses and all losses:
and then to divide larger profits than can be made at any other
business?
The issuing of currency is the prerogative of sovereignty. The real
sovereign in this country--the government--can only issue a currency
of the actual dollar: can only issue gold and silver--and each
piece worth its face. The banks which have the privilege of issuing
currency issue paper; and not content with two more dollars out for
one that is, they go to five, ten, twenty--failing of course on the
first run; and the loss falling upon the holders of its notes--and
especially the holders of the small notes.
We now touch a point, said Mr. B., vital to the safety of banking,
and I hope it will neither be passed over without decision, nor
decided in an erroneous manner. We had up the same question two
years ago, in the discussion of the bill to regulate the keeping
of the public moneys by the local deposit banks. A senator from
Massachusetts (Mr. WEBSTER) moved the question; he (Mr. B.)
cordially concurred in it; and the proportion of _one-fourth_ was
then inserted. He (Mr. B.) had not seen at that time the testimony
of the governor and directors of the Bank of England, fixing on
the _one-third_ as the proper proportion, and he presumed that the
senator from Massachusetts (Mr. W.) had not then seen it, as on
another occasion he quoted it with approbation, and stated it to
be the proportion observed at the Bank of the United States. The
proportion of one-fourth was then inserted in the deposit bill;
it was an erroneous proportion, but even that proportion was not
allowed to stand. After having been inserted in the bill, it was
struck out; and it was left to the discretion of the Secretary of
the Treasury to fix the proportion. To this I then objected, and
gave my reasons for it. I was for fixing the proportion, because
I held it vital to the safety of the deposit banks; I was against
leaving it to the secretary, because it was a case in which the
inflexible rule of law, and not the variable dictate of individual
discretion should be exercised; and because I was certain that no
secretary could be relied upon to compel the banks to _toe the
mark_, when Congress itself had flinched from the task of making
them do it. My objections were unavailing. The proportion was struck
out of the bill; the discretion of the secretary to fix it was
substituted; and that discretion it was impossible to exercise with
any effect over the banks. They were, that is to say, many of them
were, far beyond the mark then; and at the time of the issuing of
the Treasury order in July, 1836, there were deposit banks, whose
proportion of specie in hand to their immediate liabilities was as
one to twenty, one to thirty, one to forty, and even one to fifty!
The explosion of all such banks was inevitable. The issuing of
the Treasury order improved them a little: they began to increase
their specie, and to diminish their liabilities; but the gap was
too wide--the chasm was too vast to be filled: and at the touch of
pressure, all these banks fell like nine-pins! They tumbled down in
a heap, and lay there, without the power of motion, or scarcely of
breathing. Such was the consequence of our error in omitting to fix
the proper proportion of specie in hand to the liabilities of our
deposit banks: let us avoid that error in the bill now before us.