Many who are inimical to paper money in every other form, are friendly to the use of Bank paper because it is, they say, equal to specie, in as much as specie can be obtained for( it at the will of the holder.
But what. does this” convertibility” amount to? Though we have between three and four hundred Banks, we have not yet one at every man’s door; and, if we had, every man would, in the course of business, be compelled to receive the paper of distant Banks. A man prefers silver, and yet not choose to walk even half a mile, to have his note changed.
Those whose money dealings are most extensive, like not to offend the Banks by too frequent calls on them for specie. It might lead to a curtailment of their accommodation. They have as deep an interest as the stockholders and the directors in keeping the notes in circulation.
In addition to this, it must be remembered, that Bank paper is ” convertible” into only one of those species which should, according to law and constitution, be the money of the United States. An incorrect valuation of gold at the Mint, and paper money together, have driven this precious metal from the country. Bank paper is “convertible” into silver only, which is inconvenient for large payments, and for transportation to distant places in large amounts.
From this combination of causes, not more than one-twentieth of the paper is actually “convertible” at any one time and herein consists of the safety of the Banks. An attempt to convert but one half of the Bank medium, into specie, would, though several months were allowed for the operation, break all the Banks in the country.
Now, can such a “convertibility” make Banknotes “equal” to specie? We mean equal to specie as money, in its three functions of a circulating medium, and a standard and measure of value. We know the two articles are equal in the market, but the question is if they ought to be so. Convertibility,” so far from being au assurance of the soundness of Banknotes as money, is not even an assurance, for three days together, of their soundness as bills of credit. This is verified in the case of Banks whose paper is in one week at par, and in the next at a discount of fifty percent.
When the contingencies on which convertibility depend, are taken into consideration, the risk appears so great as of itself to outweigh all the arguments usually adduced in favor of Bank medium.
The practice of the Banks is to make provision for those demands only which it is probable will be made upon them, which provision is seldom for more than one-fifth of the amount of their actual engagements to pay on demand. It is very easy for the Directors to make a mistake in their estimate of probabilities. Events that they could not foresee may occur, and circumstances they cannot control. It is not always easy to say where the line of safety should be drawn; and the Directors are at all times tempted to transcend it, from the desire of making large dividends, and raising the price of their stock in the market. Sudden changes in the political and commercial world, may render the best-conducted Banks unable to comply with their engagements, though they may have in store double the amount of specie, which would, in other times, be necessary to support their credit.
On a certain day in 1819, there were but $80,000 between us and universal bankruptcy. 1.’his was the whole amount of specie in the United States Bank at Philadelphia; and if that had been exhausted, a shock would have been given to Bank credit, which would have caused a general suspension of specie payments. In 1825, the condition of both England and the United States was hardly less critical: The failure of two or three of our principal Banks would cause a run upon all the others. They could then comply with but a part of their engagements, and their inability to satisfy the claims of the holders of their notes and of depositors, would render the fulfillment of other money contracts impossible. the credit which Bank notes enjoy has been called “suspicion lulled to sleep.” Events may awaken that suspicion.
Attempts are sometimes made to show the perfect security of the Banks, by contrasting the amount due by them for notes in circulation and for deposits, with the amount falling d.ue to them every sixty or ninety days on account of mercantile paper discounted by them. But such calculations, even when they rest on indisputable data, prove only the ultimate solvency of a Bank. The amount due by the Bank, on account of deposits and account of notes in circulation, may all be legally demanded in one day; nay, in one hour. A greater amount may be owing to the Bank, but it is payable at different times, and the extremes of the term are sixty or ninety days apart. The individuals who owe this money to the Bank may be rich men: but their ability to pay, within the time agreed upon, depends on the credit of Bank paper being maintained. Let the depositors suddenly withdraw but one-half the amount of specie ordinarily retained by the Banks, and the credit of Banknotes necessarily falls. A portion of the debts due to the Banks may be paid in this depreciated paper, but the Banks will not have the means of satisfying all their creditors. There being little specie in the country, the collection of debts due by individuals to individuals, would be suspended, (if Bank paper should suddenly lose its credit.)
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