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Table shewing the circulation of sundry banks at different periods.
$2,709,291 $3,444,996 $3,419,280 $3,208,869
The establishment of a new bank draws together a new set of customers, encourages new enterprizes, opens new channels of cir. culation, and substitutes bank credit in a variety of operations formerly carried on by the use of individual credit. The constant demand for bank accommodations, creates an obligation on the part of the borrower towards the bank that affords them, which is usually repaid by exertions on his part to extend its circulation. An exaction of this kind is very frequently made of the borrower, and the banks will of course prefer among the applicants such as can be of most service in regard to circulation.
The example of a neighboring state is frequently quoted, to show that the profits of banking may be brought down to the ordinary rate of interest upon capital, by increasing their number without embarrassing the currency. And it is very true that in Massachusetts, the banks divide only about the legal rate of interest, and sustain a circulation so much less than ours as to be but barely sufficient to pay their expenses.
We apprehend however the difference is caused by other circumstances than the number of banks, and that the larger circulation of our banks is owing to causes which do not exist there. One is probably the fact, that all the Massachusetts banks have to redeem their paper in Boston, which is not the business centre of that State as New-York of this. Another and the chief cause may be the greater activity and extent of business in this State, and the vastly greater facilities of internal communication.
A large amount of the agricultural productions of the west is purchased and consumed in the eastern part of the State. The lumber, salt and iron districts, furnish also a large amount of exchanges with other parts of the State, and the mere item of transportation of our own productions and those of other States through it, is of no inconsiderable amount. All these operations require the use of currency, and afford the banks an opportunity of throwing their paper into distant counties in the ordinary course of business. Probably no part of the Union, in proportion to its wealth and productions, affords equal facilities for the employment of currency.
We do not mean to say that the circulation of bank paper, as proportioned to capital, and consequently the profits of banking, might not in some degree be diminished by the increase of banks ;
but to undertake by this means to reduce the profits to the rate of interest upon money, we should think would require such an enor mous addition to the banks and bank capital of the State, as could hardly fail, to overload the currency, derange prices, and destroy that public confidence which the banks now so justly enjoy, and which is so vitally important both to them and the community.
To attempt to effect the same object by a reduction of the rate of interest, we should think would be equally unavailing. The reduction of the rate of interest generally, would still leave the banks in the enjoyment of the same advantage over individuals which their circulation and deposites now give them, and the reduction of bank interests below the rate allowed to individuals. would have a tendency to encourage various shifts and devices to evade the operation of the law. We have no doubt that money is now worth in every part of the State the full legal rate of interest, and has been so during the whole of the last year. Capital has been used advantageously at that and even a higher rate in many parts of the State, and the people at large probably never enjoyed a more profitable year's business than the last. The field of enterprize is still broad enough to warrant the assurance, that for many years to come, capital will readily command the present rate of interest.
If such is the case, the policy of embarrassing its free circulation, by fixing the legal below its real value, and thereby disturbing the general interests of community with a view to the particular effects of the measure upon the banks, might well be doubted.
Except the comparatively few who expect to profit by obtaining and selling stocks, and the still less number who have surplus capital to invest at the legal rate of interest, the great body of the people who are petitioning for banks, do so because they want capital, and banks as the means of furnishing it at the legal rate of interest. It is believed that a want of currency to effect the exchanges of property, has not been seriously felt in any considerable section of the State; but business having been profitable, more capital is wanted for the purpose of extending it.
The steady demand for money during the last two or three years; the successful prosecution of the various enterprizes to which it has been applied; and the unprecedented demand for new banks, indicate most clearly that as yet we have no superabundance [Assem. No. 102.).
of capital, and should rather invite than discourage its influs. We should think it better to invite it by the present liberal rate of interest, than to use too much credit as a substitute in the shape of
Aside from the danger of paper currency, arising from its liatility to injurious fluctuations in obedience to the laws of trade, too much currency operates as a tax upon the public, for the benefit of the banks. The public are paying interest upon all the bank pa. per in circulation, and so far as it is needful to fulfil contracts, an equivalent is received in its convenience; but when more is forced into circulation than the wants of business require, the interest paid upon it is a dead tax. This remark applies however only to the amount of actual circulation among the community. The statement made by each bank of its amount of notes in circulation, includes not only those in the hands of the community, but also those in other banks. We have for the last two or three years been procuring data for the purpose of estimating the proportion between the amount held by the public and by other banks, and find that in this State about one quarter of the issues of each bank are held by other banks. The claims of the public, therefore, agains the banks for the redemption of their paper, will always be about one quarter less than the amount of circulation shown by the bank statements.
The amount of circulation of the banks subject to our inspection, as shown by these statements, is $15,400,000, of which about $3,850,000 is in the hands of other banks, leaving $11,550,000 in the hands of the public, to redeem which, the banks possess about $2,200,000 of specie.
Believing that the most we have to fear from our banks is from the injurious effects of their overaction upon the industry of the country, and that excessive issues of paper currency tend in some degree to affect prices, particularly of articles of domestic consumption; encourage overtrading, and lead to revulsions in business; aggravate the distress occasioned by commercial reactions; endanger public confidence in its prompt redemption, and therefore may promote panics, affecting injuriously the whole credit of the country: And for the reasons also that too much paper currency is a tax upon the public, and being itself but an extension of credit, does not furnish that actual capital to the community which is wanted for business purposes; we would respectfully suggest the opinion, that in the future distribution of bank capital, (if more is deemed necessary,) it will generally be better to increase that of the existing institutions, than to create new ones; and that no new bank should be incorporated with a less capital than $200,000.
The object to be attained by each of these suggestions, is to furnish the most capital to the community, with the least addition to the amount of circulation.
The average circulation of the $100,000 banks is about $160,000; that of the $200,000, about $240,000; while that of the $300,000 and upwards seldom exceeds the amount of capital.
The first therefore iends to its customers $100,000 of capital, and $150,000 of its credit; the second, $200,000 of capital, and $240,000 of credit; while the third only lends an equal amount of each.
In point of security also, the large capitals are preferable, because the claims of the public upon them are proportionably less, and the capital must be exhausted before the bank fund or the public can suffer. A bank that has loaned $100,000 of capital and $150,000 of its own bills, will have due to it $250,000, of which it will require three-fifths to satisfy the claim of the public for its notes in circulation; while one that loans $300,000 of capital and an equal amount of its own notes, will have $600,000 due to it, of . which only half is required to satisfy the public claims.
There is another reason in favor of increasing the existing capitals, in preference to creating new institutions, in the fact, that the existing ones have acquired a character, know the wants of the community, and the course and channels of business. They are fortunately all well managed. Their officers are gentlemen who, for skill and integrity, will compare with any other body of men in any branch of business. Their directions have been selected from among the business men; and in many places, it is no easy matter to find an abundance of suitable persons for directors. Nothing is more important to the good management of a bank, in reference as well to its own interest as the public security, than a discreet and intelligent board of directors. By scattering new charters too profusely, they may sometimes fall into other hands.