William Graham Sumner

“ In our national bank system bonds, as circulating evidences of a government loan, are bought and deposited, and the notes issued upon them may properly be regarded as constituting an internal core or permanent part of the total circulating medium of the country, with a provision for cash redemption upon the variable margin.
This system of currency has put an end at once and forever to the old banker's trick of expansion and contraction. The present generation knows of that trick hardly by tradition. It is now complained that the national bank note currency is not elastic. That is very true. ”

“ Whether there be any such gain or not, our attempts to win it have all failed, and they have cost us, in each generation, more than a purely specie currency would have cost, if each generation had had to buy it anew. The privilege of selling to the public the cheap money on which they had set their hearts, either in the form of paper or base metal, has been fought for with rapacity, and with social and political abuses of the gravest character. States which provide coinage of the most perfect kind win no profit from it ”

“ One of the chief subjects of complaint was that the national banks get double interest on their capital. Every bank of issue gets double interest on its capital, minus such deductions as must be taken into account for taxes, specie reserve, and so on. If the bonds must be bought at a premium, and only 90 cents on $1 of their par value can be obtained in circulation, the deductions are so important that the special advantages of being in the national system are very slight. ”

“ Theoreticial and practical financiers must agree that this manipulation is a subject of grave apprehension, all the more because it is beyond the power of any man to foreesee or estimate the consequences in their remoter reactions and more extended complications. The operation only wins time. It is no remedy. When the respite expires, if no sound measures have been adopted, the problem is still there, greater and more oppressive than ever, and complicated with the consequences of arbitrary interference with one of the most important and most delicate parts of the financial system. ”

“ Thirty States require that the reports be published in the local newspapers; twenty give reports about banks in annual or biennial reports; six make no provision for publishing information about them. Fourteen States allow banks to issue circulation; nineteen prohibit circulation; several have no law on the subject. Twelve States have no provision for the examination of banks by State officers. Seven States have no restrictions on bank loans; nine prohibit loans to officers or employees; most of them prohibit loans on the bank's own stock; twenty-four have no requirement for a cash reserve. ”

“ It has been objected, and on theoretical grounds with complete good reason, that this system guarantees only ultimate re-payment, not cash redemption or true convertibility; but in practice the note is as good after the bank has failed as before, and continues on its course, the holder probably never knowing that it was issued by a bankrupt institution, until it finds its way to the redemption bureau. It must be noticed that, in this respect, the national currency differs essentially from its prototype in New York. ”

“ Every autumn a stringency was experienced in the money market when the demand came for moving the crop. Under the pressure of the demand created by this stringency, the Secretary of the Treasury re-issued, in 1869, $1.5 millions of the treasury notes which had been retired by Secretary McCulloch. They were afterwards withdrawn. In 1871 a like sum was issued and withdrawn. During these years the effect of the central redemption system was to draw more and more of the free capital of the country into New York ”

“ The redemption at the redemption cities was done away with. This device was intended really to keep the national currency clean and in good order. The banks were also allowed by this act to deposit legal tender notes and take up their bonds, thus reducing or entirely withdrawing their circulation. The limit of the greenbacks was set at the point where it then stood, with the $26 millions out,—that is, at $382 millions.
The veto by President Grant of the inflation bill in the spring of 1874 was really the turning point in the struggle between inflation and resumption. ”

“ After this, therefore, it was free to anybody under the conditions of the law to organize national banks, or to dissolve and wind up the same at will; but whenever any new banks were formed, increasing the national currency, the Secretary of the Treasury was required to redeem greenbacks for eighty per cent. of that increase, until the greenbacks should be reduced to $300 millions. ”

“ The notes were to be a legal tender to and from the government and to be received at par by all the banks in the system. The banks in the sixteen leading cities were required to maintain a reserve of lawful money equal to twenty-five per cent. of their circulation and deposits, and all others fifteen per cent.; three-fifths of the fifteen per cent. in the latter case might be kept on deposit as a redemption fund in one of the sixteen large cities, and one-half of the reserve of the large cities might be kept in New York. ”

“ A tax of one per cent. per annum was laid on the average amount of the circulation, and one-half of one per cent. on the deposits, and the same rate on the capital stock not invested in United States bonds. The two last were repealed March 3, 1883. The act of March 3, 1865, allowed only a smaller proportion of circulation to capital for large banks, so that a bank with more than $3 millions capital could have only sixty per cent. ”

“ The run for deposits now began in the country towns, although without excitement or panic. The country banks called home their deposits from the redemption cities, and the latter from New York. The New York banks called for it from Wall Street, where it was in use. Rates for money rapidly advanced and prices fell. On the 20th the Union Trust Company and two or three other banks and trust companies suspended. The stock exchange became a scene of panic and prices fell with great rapidity twenty per cent. or thirty per cent. ”

“ It is a great point which must be put to the credit of the civil war that it brought about what was otherwise a political impossibility. The federal laws and the federal administration of justice had not always stood up unflinchingly in defense of sound doctrine and the integrity of institutions ”

“ In the meantime, the factions produced by various dogmas about the currency, by interests engaged in it, and by party intrigues to profit by it, have grown fierce and stubborn. They exhaust their strength in making a deadlock. We are in a financial crisis which is becoming chronic, and which will be solved by a great disaster, unless we can rally knowledge and statesmanship to deal with it.
the end.
↑ 22 Banker's Magazine, 174. ↑ 19 Banker's Magazine, 410. ↑ 20 Banker's Magazine, 198. ↑ Noyes, The Banks and the Panic of 1893. ”