very well to secure the public from the occasional failure of an association or two to redeem its bills, but it does not provide for the possibility that all the associations may be forced to refuse the specie redemption of their notes at once, and hence the entire amount of their circulating medium may instantly become a charge upon the state. Professor Tucker says in his book, and says very truly, that "laws themselves but reflect the passions and feelings of m f men;" and we have found out more than once in America, that those passions can unmake a law with the same rapidity that they made it. But the catastrophe of 1837 first proved to the United States the fact that those passions could venture to take the initiative step. and break the law before it was unmade, with perfect impunity. We say this in no spirit of reproach, and under a perfect consciousness of the necessity of the case. But the question cannot and ought not to be overlooked by any person who desires to estimate the force of any injunction of law, whether it is calculated to stand against the combination of private interest which circumstances may be expected to form into opposition. We see nothing in the free banking law which will enable it to carry any more binding force than belonged to any of its predecessors, on the same subject.

This is the true difficulty of the credit system, for which neither Professor Tucker, nor any other writer that we know of, has yet entirely devised a remedy. The popular feeling will make null the law-it will make odious the attempt to avail of all restrictive provisions—and there is no resource. An irredeemable paper currency becomes, for the moment, the interest of all the debtors of the community, and through them, of the great majority of creditors; and these give the tone to public opinion. This is an evil to which we who live in a republican government are most particularly exposed, and against which it is our duty in moments of ease to endeavor to discover a remedy. We frankly confess we know of nothing at all likely to answer the purpose, short of an increase of the national power over the currency, much more considerable than any party in the United States would be willing to advocate. We do not consider the notion of security by pledges of stock and land, which constitutes the new feature introduced into our system by the free banking law, as well founded to the extent required, for reasons which we propose now, very briefly, and very respectfully, to submit to public consideration.

The free banking law requires no evidence from the associations organized under it of the actual payment of capital beyond the extent of the sum pledged for bills to put into circulation, nor does it contemplate giving any additional security to that species of circulation which goes under the name of deposites in bank. It provides for no specie redemption of the bills beyond twelve and a half per cent., and the old precaution of double interest in case of failure, which was found to be of little service in 1837. Now, supposing, for the sake of illustration, that on the first of January of that year, the entire circulation of New York had been carried on under the new law instead of the old one, and that the twenty-four millions of bills then current had been secured by mortgage of stocks and lands to the comptroller of the

state.

We will, for the sake of brevity, set the sum down at to which the deposites may be added in round numbers at

making the sum of immediate liability

$54,000,000

which might be considered as secured by 89,500,000 of specie, and

24,000,000 of property pledged. We know that a steady drain set in from that date, which, by the first of June, reduced the circulation to $15,400,000 and the deposites to

making in all

23,400,000 $38,800,000

being a reduction within five months of $15,200,000, at the cost of five millions, or more than half of the specie resources on hand-and a necessity of refusing the payment of any more. Yet, at the very moment of refusal, the proportion which the specie actually bore to the bills remaining out, would have been nearly equal to 30 per cent., without being sufficient to resist the pressure. What shall we then think of the safeguard in the new law, which releases associations from all obligations to keep on hand in specie more than twelve and a half per cent. of their circulation, and not even that sum for periods of twenty days together?

But it may be said that the bills would still have remained good. We propose to consider that point hereafter, for the sake of directing our more immediate attention to another important view of the subject. It will be perceived by the preceding figures, that the actual amount of liability from the demands of depositors at both the specified dates, exceeded that arising from the bill holders, and that the reduction of both were nearly, if not quite, with equal rapidity. Now, if the new law had been in operation, it is very certain that the depositors, conscious of the little safety of their position, would have been most anxious of all to convert their demand, which stood without security, into bills for which they would have had the pledge of stocks. But the amount of bills secured by these stocks never would have exceeded $24,000,000, for which the banks would have been liable to other creditors; besides, the depositors, who alone would have had their additional claims, equal to 30,000,000. Hence, any serious drain from the depositors must have been productive of a suspension of specie payments on the part of the free banks, just as certainly as the drain of 1837 was upon the chartered ones. And the probability of such an event at any future day may readily be estimated by the risk which, as the law is, depositors who do not draw out their money must run, of coming in last on the list of creditors, in cases of bankruptcy.

But it may be urged, that the amount of liabilities incurred by the banks in 1837, would never have been so great, if they had been organized under the new law. The necessity of giving security for all the notes issued, would have checked the excessive expansion of credit which brought on the catastrophe itself. We should concede much to this argument, if the actual note circulation of New York had proved to be ill-secured by the old charter system; but it did not; ninety-six out of ninety-eight banks managed to contract their liabilities within twelve months, in a manner which they never could have done if they had not been doing business in a manner substantially safe. For example, the sum of circulation and deposites was, on the first of January, 1837, as we have seen,

but on the first of January, 1838, they equalled about

$54,000,000

28,000,000

$26,000,000

making the extraordinary contraction within a year of a contraction which, we repeat, none but sound banks could have endured. It is then plain, that however great the expansion of credit might have been, it was not more than would be likely to happen under any unrestricted system, and that however severe the drain of specie may have proved, it was not

caused so much by any well founded apprehension of the character of the bank notes, as by the inevitable course of trade, the high rate of foreign exchange, and consequent necessity for specie. To which contingencies, it may be added, the free banks will be no less liable for the future than the chartered ones have been heretofore.

But it is maintained that a suspension of specie payments by the banks ceases, under the new system, to be attended with the evils which have heretofore marked its occurrence under the old one; and that if such an event is unavoidable at certain stages of the credit system, it must be admitted to be a great thing, that its most injurious tendency, the depreciation of the paper, from the mere force of panic, has been prevented. The public will now be perfectly satisfied, that however difficult it may be at some single moment to convert the paper bills of the free banks into gold and silver, yet that these have a substantial and positive value, independently of their immediate convertibility, which no former notes of the same kind possessed, and which render it perfectly unnecessary for any body to be uneasy in the possession of them. We are inclined to the opinion, that there may be some foundation for this reasoning; and that, to a certain extent, the danger of excessive panic may be remedied by this new feature of banking. But the reasons why we do not believe it entirely remedied are these: In times of scarcity of money, the great pressure upon the commercial community commonly arises from a necessity to pay foreign debts. Bills of exchange are not to be had, and specie must then be resorted to. Now the value of bank notes in the hands of merchants consists in their instant convertibility into a means of paying their debts equally abroad as at home, and when that convertibility ceases from any cause or other they must necessarily be losers. So long as the banks can meet their engagements by furnishing the medium wanted to pay these debts, so long will the machinery of the credit system work easily; but the moment that they do not, the moment that it becomes impossible for them to redeem their paper with silver or gold, that moment the whole train of calculations based upon their ability to do so is dispersed. The demand for specie is not the more remitted on account of the failure of the banks, unless we are to suppose all the merchants to fail too, which they never will while they can help it; and the supply of it to meet that demand becoming, by the act of the banks, who take out all their stock of the article from the market, so much the more limited, a monopoly necessarily takes place in the hands of the holders, which they are not slow to improve. The price of specie rises, that is, a silver dollar becomes more valuable than a paper dollar. The currency of the community, which is paper, becomes depreciated to the extent of the difference, and the free banking law is exactly to the same extent of no avail. The comptroller of the state can do nothing to check this state of things, for he is not supposed to possess a single dollar of specie; on the contrary, he holds securities which it is his business to try to convert into specie, at the time the catastrophe happens. Hence he comes into the market as a competitor to purchase the very article for which too great a demand for the supply to be had exists in other quarters already. His interference must aggravate the disorder rather than cure it, inasmuch as he must sell his securities at a sacrifice, or he must withdraw without gaining his object, in either case weakening to some extent that degree of confidence which alone induces the public to give equal currency to free bank paper money with the precious metals, and by weakening it, also confirming a scale of depreciation between the two.

It is true, that if it were possible for the comptroller to possess property in

his hands as collateral security, which never fluctuates in value to the extent of more than one or two per cent even in the worst of times, it would be very easy for him, and for the banks whom he represents, to calculate upon the ultimate redemption of their notes in specie. But the experience of the past distinctly teaches us, that there are moments in the commercial world, when no property of any kind can be negotiated; even in Great Britain, where the national funds possess so very fixed a value in comparison with any thing we have, and where so much more private wealth exists to be drawn out in cases of great emergency, and where such resources for raising money exists in the neighborhood of the other wealthy countries of Europe, it was clearly shown in 1825-6 that at one moment even exchequer bills could not be negotiated upon any terms. And if in Great Britain, with all her advantages, and with a credit system so much less elastic than ours is in the United States, this is occasionally the result, what can we expect from any attempt to convert securities, such as we possess, upon any similar contingency?

Here lies, in short, the great obstacle to the success of the new experiment of free banking, as adopted in New York. The state is made to hold securities for paper bills, which are liable to be affected in value nearly as much as the bills which they propose to secure. No suspension of specie payments is very likely to take place, unless after every expedient to raise money has been resorted to by private individuals and companies in vain. It is not the want of property to offer, which ever creates a general suspension, but it is the impossibility of finding money into which to convert property. The comptroller here has no advantage over and above any one else, and he is subjected to the serious inconvenience of coming into the market only after it has been tried already to exhaustion. How can he expect to convert his securities, then, excepting at a most ruinous sacrifice? and if he does not so convert them immediately, who is to judge of the period to which it can be postponed, and of the goodness of the bills which rest upon their convertibility in the interval?

The whole plan is now, it is true, in its infancy, and as yet we cannot at all judge of the extent to which it may be pushed; but even now we can form some slight idea of the difficulties to which the comptroller would be subjected, if compelled at any moment to redeem any considerable amount of bills in circulation. By a return made up to the 30th of April last, it appears that state stocks had been offered and accepted to the amount of $2,137,090, and lands had been mortgaged to the value of $851,316 13. This sum is trifling, unless we regard it as the mere outset of a system, which if it has even a moderate share of temporary success, must extend itself to the supply of a much greater proportion of the currency. But even of this sum, $877,000, or more than a quarter part, consists of the six per cent stocks of the state of Arkansas, and 518,000, or over a sixth part, is of the six per cent stocks of Michigan; while the remainder is in a great degree composed of the stocks of Missouri, Maine, Alabama, Indiana, and Kentucky, and the mortgaged lands. Now, without meaning to express a doubt of the ultimate value of all this property, we must be allowed to question whether, in a time of panic, out of the whole three millions pledged, the comptroller would be able to sell at par more than at farthest $4,000 of United States stock, which we presume to be Treasury Notes, and $25,090 of the 5 per cent of the state of New York. It is but very lately that the new states of the Union have had any credit at all. They have neither fixed population, nor accumulated capital, sufficient to authorize any steady estimate to be formed of their character in meeting their

engagements, and although it may be admitted that they have the capacity of enlargement to an extent which older states are not readily susceptible of, yet this is rather an argument in favor of the withdrawal of their stocks into the hands of capitalists, who never want to convert them, than to make them the basis of a fluctuating credit system, the changes of which affect them as much as any species of existing property. We hardly think it ought to be pretended, even by the most enthusiastic believer in state stocks, that in moments of panic, when the wealthy business men of our commercial cities shall have exhausted all means of raising money, even with the offer of property in ordinary times of the highest negotiable value, the State will have any means of redeeming the circulation of the free banking companies, by the offer of such securities as those which have now been named.

The tendency of this law to increase the disposition of the states to make loans, is a feature of the system which has scarcely yet been sufficiently observed. The whole creation of the permanent debts of the states has been so much the work of a moment, that hardly time enough has elapsed to sce its practical operation. One hundred and eight millions of dollars have been contracted for within three years. Of this sum, as indeed of the whole amount, all which is in the best credit, has a tendency to find its way to London, whilst that which will not do there will be retained as material for domestic banking. So long as it is practicable, under the law, to carry on the business of lending money profitably, so long will there exist a demand for State stock, which would never have existed if it had not been for the law. And if, ultimately, that stock should, for any cause, not necessary to be stated, fail to be redeemed, we do not perceive that the loss would be likely to fall upon the bankers, who will have enjoyed the value of a paper currency, coextensive in amount; nor upon the State which authorized them; but it would fall almost exclusively upon the very holders of the bills, who were sought, most especially, to be secured.

Moreover, the intimate connexion which is thus forming between the states and the banking system, through the operation of these large loans, is another incident which has not as yet met with the consideration which it appears to deserve. Of the entire sum borrowed under the authority of the states, up to this time, estimated to be equal to one hundred and seventy millions of dollars, fifty-two millions have been raised for the purpose of banking. And it would be a curious circumstance in our history, if, whilst in Louisiana, for example, the money borrowed by the creation of stock, is used as capital for the banks there, the stock itself should be made the basis for other banks, under the law of New York. Yet we see nothing impossible, or even improbable, in the supposition. How much the interests of Louisiana and New York are thus made to depend upon the success of the credit system of the former State, fully appears. Indeed, upon further examination, we perceive that the case we state hypothetically, has already happened. For the states of Missouri and Arkansas have created no stock, excepting that which has set in motion their banks; and this very stock, to the amount of $69,000 of the former State, and $877,000 of the latter State, making more than a full quarter part of the whole capital in the hands of the Comptroller, has already. been made the basis of double banking operations, under the free law of New York. It is thus easy to perceive what a stimulus must be given to overaction, throughout the country, when the same capital can be used for so many different purposes; and when once used, and the edifice of the paper system is once made to rest upon the substratum of State credit alone, the in