their duties to their creditors, to their stockholders, and to the public generally, a necessary, an unavoidable measure? The answer is an obvious one. Because the conductors of most of the banks, for the gratification of their own purposes, and alike regardless of the safety and interests of their constituents, and of a just sense of their obligations to the public, chose-ignorantly, wantonly, or dishonestly-to conduct their affairs in disregard of, or in opposition to, those principles of currency, credit, and banking, which ought always to guide men clothed with the important trust which they had assumed. And what was that trust?

"But it is oftens aid, in exculpation of the directors of banks which have been badly managed, that, as they receive no compensation for their services, it would be unreasonable to hold them to strict account for their mismanagement. The want of compensation may furnish a sufficient cause for the refusal of a trust, but will not be admitted as a valid one for the neglect or abuse of a trust when once accepted.

"But, the office of bank director has not usually been pressed upon persons reluctant to serve in that capacity. It is a situation desired by men of influence and character.

The directors of banks (says Mr. Appleton) are selected from those of the highest standing in the mercantile community. In this view of the case, the directorship of a bank is a mark of confidence in the judgment and honesty of an individual, which is a sufficient compensation to many persons who have held that important, responsible, and useful station-and the only one which many of them have received or desired-for services ably and faithfully performed.

"The office of bank director has been eagerly sought for, and too often obtained, by persons who, destitute wholly of property, or having an insufficiency of it to carry on their enterprises and schemes, were desirous of gaining the control of the capital of others. The necessary effect of having for the managers of banks men so circumstanced, and whose sole purpose it was to use the property intrusted to them for safe investments, for the prosecution of their own plans, was to throw upon the stockholders whatever losses might be incurred, while the gains, if any, would go into their own pockets. It is obvious, that a copartnership, where one partner has all the gain, while the other party bears all the losses, must always terminate injuriously, if not ruinously, to the lending party.

"Now, if there are persons who distrust the correctness of what has been asserted in regard to the abuse of confidence and power of a portion of the directors of banks, and the injurious results flowing therefrom to their constituents, we would refer them to the numerous reports of investigating committees, who, for the past thirty years, have been employed in searching into the condition and management of banks. Such an inquiry would show that the principal source of loss of bank capital may be traced to loans made to directors, and to their friends and connexions, upon improper and insufficient securities-upon lands, houses, ships, railroads, canals, stocks, and other kinds of property, or titles to property, which are generally inconvertible, and always so in a money pressure, when the wants of a bank require their immediate conversion into money.-Secondly, upon accommodation notes or acceptances-resting on nothing but the mere promises of the borrowing parties. Notes created and tendered to a bank-not for the purpose, as in the case of business paper, of anticipating the receipt of capital already in existence, but for the purpose of obtaining possession of the capital of the bank proprietors upon a mere piece of paper-founded, not upon capital passing between buyers and sellers, but on promises passing between borrowers and endorsers;-this fictitious paper is seldom resorted to except where the party using it is without capital, or having some capital has, in his operations, gone beyond his capital, and beyond his credit, everywhere but in the bank where, from his official influence and power, he is allowed to

borrow without securities or without credit.

"We will not go the length of maintaining that loaning the capital, the credit, and the deposits of a bank, on the two classes of notes and securities referred to, is a fraud upon the stockholders and the public, because the usages of banks, under the direction of men of tried and unquestioned integrity, have given a sanction to the practice. Nevertheless, it is, we apprehend, a practice opposed to all sound and safe principles of banking-and the ill consequences experienced from its exercise, in this country, from the origin of the banking system to this day-have shown its unsoundness and its insecurity.

"It is no justification to say, and to prove that accommodation notes may be as safe as notes founded on business transactions. It is admitted, that on our Exchange there are hundreds of individuals whose single promises might, and for a long period of credit, be considered as perfectly secure; whose promissory notes, without an endorser, would command more money than any state stocks in the union-and more than the United States stocks actually sold for till within six months. The objection, however, to discounting on paper of this description, is not to be overcome by showing its solidity in particular cases-although, we will add, that, under no circumstances would it be creditable to men in such high credit as we have imagined, to tender, to a bank, notes of that character, since it would be wholly unnecessary as a mode of obtaining money—and at the same time it would be requiring a bank to violate a sound principle-affecting the safety of property-which it is important to property men to maintain inviolate.

"The objection, then, to the practice in question, lies in the abandonment of a safe principle, and

one which, if disregarded in one instance, would be likely to be infringed in another case; or else bring upon an institution the charge and the odium of injustice or partiality. If mere safety in particular cases of individuals were to furnish a rule of action, why not loan upon mere verbal promises of highly responsible persons? It would not be from an apprehension of insecurity, since, in all the great Atlantic commercial cities, there are numerous individuals, whose verbal promises, recorded in a memorandum book at the bank, would command more money, at a given term of credit, than many of the notes of directors of banks-which pass freely at their own boards—although they should be covered with endorsers of the quality of the promissors. No intelligent man will dispute the correctness of that assertion; yet it would be inexpedient and improper for a bank to invest its capital and its credit, or any portion of them, in such recorded promises, although it would not be worth one-tenth part of the sum to guarantee their payment, which would be demanded to guarantee millions of business paper, or one-thousandth part of the premium which a prudent and intelligent person would require to insure the greatest portion of the accommodation paper discounted at most of the banks through the union between 1833 and

1842."

"Matters," says Mr. Lee," are differently managed in the banking institutions of this country from what they appear to have been in the Bank of England. The directors of many of the banks in the United States have been deeply concerned in speculations in the shares of the banks under their control, and in many cases without having been possessed of sufficient capital, or any capital of their own, to sustain the losses which may have resulted from those stock operations, or from any other transactions carried on with the money borrowed from banks upon insufficient or worthless securities.*

"A very large proportion of the managers of banks seek the office for the sake of being in a position where they can borrow more money, and on more favourable terms, than they

*The president of the late United States Bank, Mr. Nicholas Biddle, in a communication before the public, makes the following remarks :

"Banks are often directed,” says this experienced banker, "by needy persons, who borrow too much, or by sanguine persons anxious only to increase the profits, without much pecuniary interest or personal responsibility in their administration. The constant tendency of banks, therefore, is to lend too much, and to put too many notes in circulation. Now, the addition of many notes, even while they are as good as coin, by being always exchangeable for coin, may be injurious, because the increase of the mixed mass of money generally occasions a rise in the price of all commodities.

ter.

"If a bank lends its money on mortgages or stocks, for long terms, and to persons careless of protests, it incurs this great risk, that, on the one hand, its notes are payable on demand, while, on the other, its debts cannot be called in without great delay-a delay fatal to its credit and characThis is the general error of banks, who do not always discriminate between two things essentially distinct in banking, a debt ultimately secure, and a debt certainly payable. But a well managed bank has its funds mainly in short loans to persons in business-the result of business transactions-payable on a day named, which the parties are able to pay, at any sacrifice, in order to escape mercantile dishonour. Such a bank has its funds, therefore, constantly repaid into it, and is able to say, whether it will, or will not lend them out again.

"Banks are the guardians of the currency, the depositories of the coin-and every feeling which can appeal to their own honour, as well as to their public duty, should urge them to maintain their credit at the sacrifice of their profits. To the Bank of the United States such considerations specially apply; but as that institution has set the example of the restriction, it forms naturally the principal subject of reproach among those who complain."

Again-after describing the process of correcting, through the operations of the banks, the evil tendencies and effects of a redundent currency, Mr. Biddle adds :

"Such is the circle which a mixed currency is always describing. Like the power of steam, it is eminently useful in prudent hands, but of tremendous hazard when not controlled; and the practical wisdom in managing it lies in seizing the proper moment to expand and contract it-taking care, in working with such explosive materials, whenever there is doubt, to incline to the side of safety. These simple elements explain the present situation of the country. Its disorder is over-trading, brought on by over-banking. The remedy is to trade less and to bank less."

How much cause has the country to regret, that a man whose theoretical views of banking were so correct, did not always adhere to them in the management of the institution under his direction and control? Mr. Biddle refers to the complaints against the restrictive measures of the Bank of the United States, coming, no doubt, from the local banks, whose operations would thereby be restrained and he justifies the course the United States Bank had taken. Now, in reference to the returns of that bank, we find the following facts :

otherwise would be able to do, and at the same time have an opportunity of accommodating their friends and dependents. This, in a country where money is frequently worth two or three per cent per annum beyond the bank rate of interest, and occasionally a much higher rate, is a strong inducement for men transacting a heavy business on a small capital, and in numerous instances merely on credit, to endeavour to obtain the

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The currency of the country, including the issues of the United States Bank, could not have exceeded 55,000,000 dollars of bank-notes-and the deposits may have been 45,000,000 dollars or 50,000,000 dollars: There are no returns published for that year, but as the circulation and deposits, by Mr. Gallatin's estimates, amounted, in 1830, to only 119,000,000 dollars, the inference is-since the currency of the country was not in a state of expansion-that the bank liabilities did not exceed 100,000,000 dollars, or 105,000,000 dollars.

Now, if the currency could have been maintained at the point it was established, when Mr. Biddle thought it expedient to exercise his restraining power over the local banks, the country would have been saved from the immense injury, suffering, and disgrace, inflicted upon it by the subsequent over-issues and long loans of the banks.

"But, did the subsequent conduct of Mr. Biddle evince an adherence to the sound principles and the prudent course which he had, in the communication referred to, prescribed to himself and to others, intrusted-as he well remarks-with the guardianship of the currency? A reference to the returns of the Bank of the United States, furnishes a reply to that question.

"The liabilities and loans of the United States Bank, in 1828, the date of the publication of the letter from which extracts have been made, and which has always been ascribed to Mr. Biddle, have already been stated. The bank at that period, and for two years subsequently, appeared, by the returns, to have been carrying out the views presented to the public in Mr. Biddle's disquisition upon currency and banking. The returns after that time show a sudden and enormous extension of operations, as will be seen by the following figures:

"If the returns of 1828, when Mr. Biddle wrote his essay, be contrasted with those of 1832, the result will show, in a striking manner, how entirely all prudent considerations had been forgotten or disregarded by the conductors of the bank:

"The United States Bank, the great regulator of the currency and of the exchanges-according to the statements and reasonings of the advocates of our monetary system-led the way, followed by the state of New York, the returns of whose banks stood as follows:

:

"The banks in most of the states made corresponding movements. The aggregate returns of all the banks, exhibiting the following results, show the extravagant, the insane movements of the banks, during which period prices of every commodity rose; first, from the effects of an augmen

6

appointment of a bank director; and that being once effected, the situation may generally be held as long as will suit the purposes of the elected, or as the bank may happen to continue in existence. In cases where persons who are desirous of borrowing largely fail of being elected into an establishment already existing, it is not uncommon for them to found banks, in which they contrive to have the command of the elections, and when once incorporated they sell out their own shares in the corporation, purchased with borrowed money, and thus accomplish the object they have in view, namely, to get the control of the capital of the stockholders, who may have subscribed for shares with an intention of holding them as a permanent investment. Even in banks established on better principles, the direction,' says Mr. Gallatin, must necessarily be placed in the hands of a few men, who have comparatively but little interest in the bank. Most of them are selected amongst men in active business, in order that they may judge of the solidity of the paper offered for discount; and as they are not paid, it is impossible to expect that they should attend without deriving some compensation for the sacrifice of a portion of their precious time. This may consist in part of the discounts they obtain for themselves, which may always be kept within reasonable bounds. But the power and consideration attached to the office, can only be obtained by granting favours; whilst, on the contrary, refusal renders the directors unpopular. To this may be added a want of moral responsibility.'

"Take the opinion of another writer upon banking, Mr. Nathan Appleton.-From one of his pamphlets, we extract the following passage: It has not been uncommon for

tation of money as compared with exchangeable commodities; secondly, in consequence of a spirit of speculation and gambling, which will generally, if not always, follow and accompany such an expansion of credit and currency :

"Of this immense amount of loans, there is reason to believe, from the facts which have been brought to light by developments of the affairs of banks, that by far the largest proportion were made to men of bold enterprise, or, more commonly, to reckless speculators and unprincipled gamblers, who were trading, not upon capital, nor upon credit to which they were entitled, but upon the ignorance, credulity, or upon the fraudulent compliances of unfaithful and dishonest managers of banks. The largest portion of the unbankable, doubtful, and worthless securities which the banks discounted at the period referred to, were probably for the account of the officers and directors of banks, and their relations, friends, and associates.

"Of the two classes of favoured borrowers of bank capital and bank credit, a very large majority have failed of success, or were utterly ruined; and the bank stockholders, who had furnished them the means of doing business, were, of course, sufferers to the extent of the support given them. Such has been the manner in which the capitals of banks, in a majority of cases, have been disposed of. Nor is there any reason, suggesting itself to our mind, why they should not hereafter pursue a similar course, so long as the proprietors of bank capitals confide the care and management of them to persons who, from the position they are placed in, have an interest, to thus mismanage them, too powerful, judging from the past conduct of bank directors, to be restrained and over-ruled by considerations of duty to their constituents, the corporators, or, to the public, who have an interest in the safety and solvency of banks as holders of their paper issues.

"Banks,' as Mr. Gallatin has told us, and it should never be forgotten, are governed rather by borrowers than lenders;' and, as we will add, the principal borrowers of banks, especially in a money pressure, are the directors of banks and their relatives, friends, and dependants. It is believed, that in all cases,' says Mr. Nathan Appleton, of bank failures in Massachusetts, the failure of the principal stockholders and directors has accompanied, or preceded, the failure of a bank.' Banks are too often directed by needy persons, who borrow too much, or by sanguine persons anxious only to increase the profits, without much pecuniary interest or personal responsibility in the administration. The constant tendency of banks, therefore, is to lend too much, and to put too many notes in circulation.' This is the opinion of Mr. Nicholas Biddle, and his experience of bad banking has been large enough to enable him to form a correct judgment on the point in question.

banks to have been gotten up, with a view to furnish funds for private speculation, or the private use of the principal stockholders; or the same object has been sometimes accomplished by buying up a majority of the stock, so as to control the choice of directors.*

"That there is a considerable amount of banking capital, belonging to persons of great wealth we know to be the case, and if, we would ask, if any one can doubt that they all regret having placed their confidence in those institutions? It is true, however, that those capitalists who have been directors of banks, or who have been so much in the current of business as to be well informed of the principles on which they are conducted, avoid bank stocks as unsafe for a permanent investment of property. If they depart from that rule, occasionally, it is by compulsion as it were. It arises from the difficulty, of finding any better mode of investing trust property, owing to the restraints legally imposed on guardians, executors, and trustees, as to the class of securities on which property intrusted to them shall be loaned or invested. But, under any other circumstances, we imagine that the prudent and foreseeing capitalists shun investments in bank shares, not that they would be dissatisfied with a moderate rate of interest, but because they are afraid of losing their capital. It is a well known fact,' says Mr. Appleton, that the most intelligent and knowing capitalists avoid bank stock as an unprofitable investment; they can manage their funds better. An examination of the lists of stockholders in the large banks will show, that a very great proportion of the stock is the property of minors, widows, single women, and of charitable and religious societies, a class of persons and institutions entitled to the especial protection and care of government, rather than to be made to support the burdens which properly belong to others who are more able to take care of themselves.'

"These remarks were made in 1831, since which period the stockholders of banks have lost a much larger sum, by the mismanagement and the misconduct of bank directors, than the entire banking capital of the country, as it stood by the returns coming down to the close of the year 1830. What may remain of the wasted and impaired capitals of the 901 banks is a matter of uncertainty. There can be no doubt, we conceive, that a considerable portion is invested in state stocks, lands, mortgages, accommodation notes, and other uncertain securities-always difficult of realisation, and in a money pressure (which, as the bank managers are now proceeding, will sooner or later overtake them), are likely to become greatly depreciated or utterly worthless.

"The highest return of bank capital gave the enormous sum of 358,412,692 dollars. This was at the close of 1839. Now, as there had been a great number of bank failures previous to that time, the stockholders could hardly have failed losing some 30,000,000 dollars, or 40,000,000 dollars, between 1833 and 1839, by outright and ascertained bankruptcies.

"What may now be the actual value of the bank capital of the country, there is no means of ascertaining from any official statements before the public; but from a careful research into such returns as have been made and published, we should venture to say, that its market value, on the 1st of January, 1843, at the time the currency was in a sound state, and the spirit of speculation and gambling in stocks had not been revived, did not exceed 200,000,000 dollars to 225,000,000 dollars.

"If this be a correct view of the matter, or one approaching to correctness, then it follows, that the proprietors of bank stock have lost by bad banking, between 1833 and 1843, the enormous amount of from 163,000,000 dollars to 198,000,000 dollars.

"The author of this pamphlet, Mr. Isaac Bronson, pointed out the causes of the embarrassments in which the whole country was involved. Some of his remarks upon that point have already been cited, to which the following are added:

"Just anterior to the prostration of business our manufactures and commerce were greatly extended, and conducted mainly on credit. Individuals and companies, with little or no capital, were often found to employ tens and hundreds of thousands. These borrowed means were supplied by the immense amount of paper currency furnished by the banks which had been established in the United States. The banks on the one hand and the men of business on the other, considered it for their respective interests to employ the greatest possible amount of paper money. As the profits of the banks were proportional to their discounts, and these were done by the issuing of paper, it is very obvious, that there would be a constant tendency to excess. This would be restrained by nothing but the necessity of redemption. But unless an adverse balance of trade, requiring remittances to foreign countries, or some other exigency out of the course of domestic business, should create a demand for specie, none would be exacted. Paper, being the more convenient currency, would be preferred in the common exchanges of trade, and the gold and silver would repose in the banks.

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In referring to the abandonment of the principles laid down by Mr. Biddle for the government of the bank over which he presided, we are far from ascribing to the course pursued by it, however imprudent or culpable it may justly be deemed, that extreme degree of importance which has been given it, by many of the local banks, and party politicians in both cases influenced by hostility to

that institution.