Perils of State Banking (1818)

BY A COMMITTEE OF THE NEW FORK LEGISLATURE

. . . THE committee . . . as legislators and as guardians of the public welfare . . . give it as their undivided opinion, that . . . banking establishments, increased as they already have been, to a great extent in the interior of our state, counteract entirely all the beneficial effects expected from them; and instead of facilitating exchange and the transmission of money from one part of the state to the other, it has rendered it impossible to be done without great loss; in consequence of local banks having engrossed the whole circulation in their neighborhood, and the depreciation of their notes abroad, to the very great embarrassment of internal commerce. But this is not the extent of the evil, nor, in the opinion of the committee, by any means the greatest; but the effect it produces on society, immediately within their vicinity, is still more to be deplored.

They enable the designing, unprincipled speculator, who in fact has nothing to lose, to impose on the credulity of the honest, industrious, unsuspecting part of the community, by their specious flattery and misrepresentation, obtaining from them borrowed notes and endorsements, until the ruin is consummated, and their farms are sold by the sheriff. Examples of this sort are too common and too notorious to need any illustrations from the committee. . . .

By adopting a variety of schemes to get their notes into circulation, such as placing a partial fund in a distant bank to redeem their paper, and after the fact becomes generally known that their paper is at pax in that quarter, issuing an emission of notes signed with ink of a different shade, at the same time giving secret orders to said bank not to pay the notes thus signed, and subjecting the owners of them to loss and disappointment, compelling them either to sell them for what they would fetch, or to return without accomplishing the business they went on. . . .

Others, by a different stratagem, but no less contrary to the intent and meaning of their charter, have issued a species of paper called facility notes, purporting to be payable in neither money, country produce, or any thing else that has body or shape, and thereby rendering their name appropriate only but by facilitating the ruin of those who are so unfortunate as to hold them. There are other practices which the committee are informed are very common, and they believe will not be doubted, which no less vitiate the first principles of their charter. They give large accommodations to individuals conditionally; to some, that they will keep in circulation a certain sum (which notes are designated by a private mark) for a specified time; but in case they return sooner, he is again to be charged with the discount on such sum for the remainder of the time; to avoid which he is compelled to make long journies into distant counties, to change the notes for those of other banks, thus squandering his time and his money for their benefit. To others, on condition that they will pay their note when due, in what is called current money, (meaning notes of such of the banks as are current throughout the state, they not considering theirs as entitled to that appellation,) which compels the borrower, during the time his note is to run, to lay by him all the current money he can collect, which of necessity he must lose the use of, and for which he is obliged to pay for the sum he may be deficient of, as the time draws near a close, a premium of from seven to fourteen, and sometimes, as your committee have been informed, as high as twenty per cent. for one day, when his note is again renewed, and the same operation is commenced anew.

To others on condition they exchange with them, a sum equal to their note offered, of notes of other banks, (for which they are compelled to give a premium,) and receive their own in return. To others, on condition one half the sum remains in the bank until the note is due, thereby receiving an usurious interest. . . .

They hold the purse strings of society, and by monopolizing the whole of the circulating medium of the country, they form a precarious standard, by which all the property in the country, houses, lands, debts and credits, personal and rent estate of all descriptions, are valued, thus rendering the whole community dependent on them, and proscribing every man who dares oppose or expose their unlawful practices: and if he happens to be out of their reach so as to require no favor from them, then his friends are made the victims, so that no one dares complain.

The merchant who has remittance to make abroad, is contented to pocket the loss, occasioned by the depreciation of their money, rather than hazard their resentment by asking them for specie or current notes; and here the committee beg leave to state as a fact, an instance where the board of directors of a bank passed a resolution, declaring that no man should hold a seat at that board, or receive any discounts at the bank, who should trade at a certain store in the same village, in consequence of the owner having asked for a sum less than four thousand dollars in current money to remit to New-York, while at the same time he kept his account in said bank. . . .

. . . the committee cannot refrain from remarking, that hitherto liberal and extended encouragement given to banking operations beyond its legitimate object, has annually invited to our capitol, skilful and experienced banking agents, professing general and not local objects . . . who . . . in the present instance, from seeing notices in the state paper of eighteen new applications for banks intended to be made at the present session, have no doubt come up with high raised expectations of reaping a rich harvest, and by amalgamating banking bills with those of more importance and more salutary in their nature, and by assorting and canvassing the house with all the conflicting interests of individuals, until all distinction is lost between the fair and the honest petitioner, and the cunning designing speculator, and thus the man who asks in the simplicity of his heart for what he honestly conceives his right, is soon made to understand, that in order to obtain it he must become the instrument of designing men, and advocate that which his better judgment tells him is wrong. And your committee are constrained to say, that this practice has hitherto been carried to such an extent, and has met with such success, as to encourage corporations as well as individuals, to assume banking powers where none were ever granted: and after having put all law and authority to defiance, and creating themselves a fund, calculating on the encouragement and skill of these agents, have had the unexampled temerity to petition the legislature of this state and urge them, through the medium of these agents, to grant them a charter for banking, as a reward for the unwarrantable assumption of that right . . . .

The committee will conclude this general report on the state of the currency, by examining briefly, the foundation on which the present circulating medium is based. The committee believe, the present circulation in the state principally consists of the notes of those banks whose nominal capitals are small, and composed principally of the notes of the individual stockholders, called stock-notes. So that the security of the public consists of the private fortunes of individual stockholders, and those fortunes, in a great measure, consist of the stock of the bank, for which they have given their notes; so that the bank is enriched by holding their notes, and they are enriched by holding the stock of the bank: And as these banks make large dividends, many rapid, and what are considered solid fortunes, are made. Like a boy mounting a summit as the sun is setting, suddenly observes his shadow on the opposite precipice, (regardless of the gulph between,) is astonished to see how tall he has grown; when night ensues, ere he is aware, he is plunged, shadow, substance and all, in the abyss below, covered with darkness and despair. Such the committee extremely apprehend will be the result of many of the present institutions, and bring ruin and distress on the country, unless they change their mode of business. . . .

On the whole, the committee coincide fully in the opinion expressed by his excellency on the subject of banks, in his speech, delivered at the opening of the session, where he says: —

"The evils arising from the disordered state of our currency, have been aggravated by the banking operations of individuals, and the una[u]thorised emissions of small notes by corporations. They require the immediate and correcting interposition of the legislature. I also submit it to your serious consideration, whether the incorporation of banks in places where they are not required by the exigencies of commerce, trade or manufactures, ought to be countenanced. Such institutions having but few deposits of money, must rely for their profits principally upon the circulation of their notes, and they are therefore tempted to extend it beyond their faculties. These bills are diffused either in shape of loans, or by appointing confidential agents to exchange them for those of other establishments. But the former mode being conducive to profit, is at first generally adopted; and in the early stages of their operations, discounts are liberally dispensed. This produces an apparent activity of business, and the indications of prosperity. But it is all fictitious and deceptive, resembling the hectic heat of consuming disease, not the genial warmth of substantial health; a reaction soon takes place. These bills are in turn collected by rival institutions, or passed to the banks of the great cities, and payment being required, the only resource left is to call in their debts, and exact partial or total returns of their loans. The continual struggle between conflicting establishments to collect each other’s notes, occasions constant apprehension. The sphere of their operations is narrowed. Every new bank contracts the area of their paper circulation; and after subjecting the communities within their respective spheres of operation to the pernicious vicissitudes of loans, at one period profusely granted, and at another parsimoniously withheld, they finally settle down into a state of torpid inaction, and become mere conduits of accommodation to a few individuals. The legislature are then solicited to apply a remedy by the incorporation of other banks, whereas, every new one of this description, unless attended by peculiar circumstances, paralizes a portion of capital and augments the general distress. The banishment of metallic money, the loss of commercial confidence, the exhibition of fictitious capital, the increase of civil prosecutions, multiplication of crimes, the injurious enhancement of prices, and the dangerous extension of credit, are among the mischiefs which flow from this state of things. And it is worthy of serious inquiry, whether a greater augmentation of such institutions may not in course of time produce an explosion that will demolish the whole system. The slow and periodical returns of husbandry being incompetent to the exigencies of banking establishments, the agricultural interest is the principal sufferer by these proceedings."

If the facts stated in the foregoing be true, and your committee have no doubt they are, together with others equally reprehensible and to be dreaded, such as, that their influence too frequently, nay often, already begins to assume a species of dictation altogether alarming, and unless some judicious remedy is provided by legislative wisdom, we shall soon witness attempts to control all selections to office in our counties, nay, the elections to this very legislature. Senators and members of assembly will be indebted to banks for their seats in this capitol, and thus the wise ends of our civil institutions will be prostrated in the dust by corporations of their own creation. It is therefore evident, the deleterious poison has already taken deep root and requires immediate legislative interference with their utmost energy.

H[ezekiah] Niles, editor, , March 14, 1818 (Baltimore), XIV, 39–41 passim.