SECURITY OF THE SYSTEM.
Supposing the property mortgaged to be ample, the system, as a system, is absolutely secure. The currency would be absolutely incapable of insolvency; for there could never be a dollar of the currency in circulation, without a dollar of capital (Productive Stock) in bank, which must be transferred in redemption of it, unless redemption be made in specie.
The capital alone, be it observed—independently of the notes discounted—must always be sufficient to redeem the entire circulation; for the circulation can never exceed the capital (Productive Stock). But the notes discounted are also holden by the trustees, and the proceeds of them must be applied to the redemption of the circulation. Supposing, therefore, the capital to be sufficient, and the notes discounted to be solvent, the redemption of the circulation is doubly secured.
What guarantee, then, have the public, for the sufficiency of the mortgages? They have these, viz.:
1. The mortgages, composing the capital of a bank, will be matters of public record, and everybody, in the neighborhood, will have the means of judging for himself of the sufficiency of the property holden. If the property should be insufficient, the bank would be discredited at once; for the abundance of solvent currency would be so great, that no one would have any inducement to take that which was insolvent or doubtful.
2. By the Articles of Association, all the mortgages that make up the capital of a bank, are made mutually responsible for each other; because, if any one mortgage proves insufficient, no dividend can afterwards be paid to any of the bankers (mortgagors), until that deficiency shall have been made good by the company. The effect of this provision will be, to make all the founders of a bank look carefully to the sufficiency of each other's mortgages; because no man will be willing to put in a good mortgage of his own, on equal terms with a bad mortgage of another man's, when he knows that his own mortgage will have to contribute to making good any deficiency of the other. The result will be, that the mortgages, that go to make up the capital of any one bank, will be either all good, or all bad. If they are all good, the solvency of the bank will be apparent to all in the vicinity; and the credit of the bank will at once be established at home. If the mortgages are all bad, that fact, also, will be apparent to everybody in the vicinity, and the bank is at once discredited at home.
From the foregoing considerations, it is evident that nothing is easier than for a good bank to establish its credit, at home; and that nothing is more certain than that a bad bank would be discredited, at home, from the outset, and could get no circulation at all.
It is also evident that a bank, that has no credit at home, could get none abroad. There is, therefore, no danger of the public being swindled by bad banks.
A bank that is well founded, and that has established its credit at home, has so many ways of establishing its credit abroad, that there is no need that they be all specified here. The mode that seems most likely to be adopted, is the following, viz.:
When the capital shall consist of mortgages, it will be very easy for all the banks, in any one State, to make their solvency known to each other. There would be so many banks, that some system would naturally be adopted for this purpose.
Perhaps this system would be, that a standing committee, appointed by the banks, would be established in each State, to whom each bank in the State would be required to produce satisfactory evidence of its solvency, before its bills should be received by the other banks of the State.
When the banks, or any considerable number of the banks, of any particular State—Massachusetts, for instance,—shall have made themselves so far acquainted with each other's solvency, as to be ready to receive each other's bills, they will be ready to make a still further arrangement for their mutual benefit, viz: To unite in establishing one general agency in Boston, another in New York, and others in Philadelphia, Baltimore, Cincinnati, Chicago, St. Louis, New Orleans, San Francisco, &c., &c., where the bills of all these Massachusetts banks would be redeemed, either from a common fund contributed for the purpose, or in such other way as might be found best. And thus the bills of all the Massachusetts banks would be placed at par at all the great commercial points.
Each bank, belonging to the association, might print on the back of its bills, "Redeemable at the Massachusetts Agencies in Boston, New York, Philadelphia, &c."
In this way, all the banks of each State might unite to establish a joint agency in every large city, throughout the country, for the redemption of all their bills. In doing so, they would not only certify, but make themselves responsible for, the solvency of each other's bills.
The banks might safely make permanent arrangements of this kind with each other; because the permanent solvency of all the banks might be relied on.
The permanent solvency of all the banks might be relied on, because, under this system, a bank (whose capital consists of mortgages), once solvent, is necessarily forever solvent, unless in contingencies so utterly improbable as not to need to be taken into account. In fact, in the ordinary course of things, every bank would be growing more and more solvent; because, in the ordinary course of things, the mortgaged property would be constantly rising in value, as the wealth and population of the country should increase. The exceptions to this rule would be so rare as to be unworthy of notice.
There is, therefore, no difficulty in putting the currency, furnished by each State, at par throughout the United States.
At the general agencies, in the great cities, the redemption would, doubtless, so far as necessary, be made in specie, on demand; because, at such points, especially in cities on the sea-board, there would always be an abundance of specie in the market as merchandise; and it would, therefore, be both for the convenience and interest of the banks to redeem in specie, on demand, rather than transfer a portion of their capital, and then pay interest on that capital until it should be redeemed, or bought back, with specie.
Often, however, and very likely even in the great majority of cases, a man from one State—as California, for example,—presenting Massachusetts bills for redemption at a Massachusetts agency—either in Boston, New York, or elsewhere—would prefer to have them redeemed with bills from his own State, California, rather than with specie.
If the system were adopted throughout the United States, the banks of each State would be likely to have agencies of this kind in all the great cities. Each of these agencies would exchange the bills of every other State for the bills of its own State; and thus the bills of each State would find their way home, without any demand for their redemption in specie having ever been made.
Where railroads were used as capital, all the banks in the United States could form one association, of the kind just mentioned, to establish agencies at all the great commercial points, for the redemption of their bills.
Of course each railroad would receive the bills of all other roads, for fare and freight.
Thus all railroad currency, under this system, would be put at par throughout the United States.