[K] The mechanics and farmers have no credit open at the banks, but the traders from whom they buy their tools, implements, raw material, and provisions, having that advantage, are able to deal with them on favourable terms; the farmer and mechanic are thus benefitted indirectly, if not immediately, by the banks.
[LETTER IV.]
DEMOCRACY—THE BANK.
New York, January 11, 1834.
The financial crisis brought on by the quarrel between the President and the Bank, has not become more serious; there is a great scarcity of money, that is, a great diminution of credit, but the failures are not yet numerous or considerable. The last arrivals from Europe have brought us the news that several of the trades in Paris and at Lyons have refused to work. What is taking place here in regard to the Bank, is analogous to what is passing in France among the tailors, bakers, and carpenters, and what occurs daily in England among the manufacturing operatives. In Europe, and particularly in France, it is the rising of a democracy or rather a radicalism, which is yet in embryo, and which, if it please God, will never come to maturity. In America, it is the despotic humour of a full grown democracy, passing more and more into radicalism, the longer it rules without a rival and without a counterpoise.
It seems to me improbable that the journeymen carpenters, tailors, and bakers of Paris, should ever give the law to their masters. Among us, the middling class (bourgeoisie) is beginning to feel that it is its duty to improve the condition of the working class. It has the authority, but it is conscious that the people has the physical force. The people has counted its own ranks and those of the bourgeoisie, but it feels that it is not enough to have the number; it sees that it has nothing to expect from violence, and that it can back its friends only by improved habits of order and morality. On both sides their reciprocal rights are mutually acknowledged; each fears and respects the other. Here, on the contrary, it is perfectly natural that the democracy should rule the capitalists, merchants, and manufacturers; it possesses at once the physical force and the political power; the middling and upper classes inspire it neither with fear nor with respect. The equilibrium is gone; there is no guarantee against the popular caprice in the United States, but the good sense of the people; it must be allowed that this good sense is quite extraordinary, but it is not infallible. A popular despotism is as easily deluded by flatterers, as any other despotism.
The Bank of the United States is at this time experiencing the truth of this observation. I have already alluded to some of the crying abuses which have excited a violent hatred against the banks in general, although without the aid of the banks it would have been impossible for the United States to have increased in population, wealth, and territory as they have done. These abuses were and are the acts of the local banks, and not of the Mammoth Bank. On the contrary, the latter, by the control which it exercises over the local banks for its own security, checks and limits these abuses, if it does not completely prevent them. The legislatures of the different States have been repeatedly called to deliberate on the question of abolishing all banks and breaking up the banking system; but they have generally thought, and justly, that the remedy would be worse than the disease. They have attempted to cure the disorder by restrictive provisions in the charter of new banks. The State of of New York, in 1829, embraced the whole subject in the Safety-Fund Act, which established a mutual supervision of the banks over each other, under the direction of the Bank Commissioners, and creates at their common expense a safety fund, designed to indemnify the public in case of the failure of any one of the banks. But these measures of repression or prevention have generally proved inefficacious, either from a defect in the means of coercion possessed by the government, or from a reluctance to use the powers conferred by the laws.
In their report of the 31st of January, 1833, the New York Bank Commissioners urgently call the attention of the legislature to the serious dangers which may result from these institutions as they are now organized, particularly in the country, and to their excessive issues in proportion to the small quantity of specie in their vaults. With two millions in specie, the banks of the State had, at that time, a circulation of above twelve millions. But this report itself proves, that the commissioners did not dare to fulfil the duties imposed on them by the Safety-Fund act; they had the authority to shut up the offending banks. Their warnings have not prevented the legislature from chartering new banks by the dozen. This year it will have to act on 105 petitions for charters, that is, eighteen more than the actual number of banks in the State. To be sure in the present instance, the let alone principle will probably be violated, for the Governor's Message of January 7, 1834, urges the two houses to arrest the flood. This Bank mania, as Jefferson called it, is created by the profits of banking, which is, and more especially was, before the institution of the Bank of the United States, the best kind of speculation, exactly in the ratio of the abuses attending it.[L]
In the local banks, especially in the country banks, the chief aim of the president and directors is, at all events, come what may, to make the semi-annual dividend as large as possible. By extending their operations excessively, they may, if they lose the public confidence, be driven to a failure; but in the United States the prospect of such a disaster is much less terrible to the greater number of merchants, and even to the smaller companies, than it is in Europe. (See Note 7, at the end of the volume.) When a bank fails, there is, indeed, a great outcry, because the number of victims is large, and the loss extends to all classes; for most of the bills being of the denomination of five dollars and under, they are very generally distributed in the hands of the labourers, as well as of the wealthier classes. But just in proportion to the distribution of the loss over the greater number of persons, is the quickness with which the clamor ceases. The president, the cashier, the directors, and others principally interested, readily find means to recover from the blow, by obtaining credit elsewhere, and the whole affair is at an end.
The Bank of the United States, on the contrary, directed by men of large fortune and established reputation, connected in business with the principal houses in Europe, charged with a vast responsibility, subject to the supervision of the Federal government, which names five of the directors out of twentyfive, and officiously watched by an army of journalists, is interested and obliged to follow another course. Not that it has not committed some errors; but it paid dear for them, and has never repeated them. Neither are its rules and regulations perfect; the experience of twenty years will doubtless suggest some modifications. But even its adversaries admit that it has been admirably managed. They pretended, at first, that the public money was not safe in its vaults, but they are at present ashamed to insist upon this point, as the investigation made by the House of Representatives proved the absurdity of the charge. The accusations now brought against it are of a political character.