This section is from the "The Science Of Wealth" book, by Amasa Walker.
Having given an extended analysis of mixed currency as it has heretofore existed in the United States, it seems proper that we should notice the important changes in that currency soon to be consummated.
In the month of February, 1863, Congress enacted a law establishing a national and uniform system of currency. This has since been put into operation to such an extent as nearly to supersede the State-bank system. We propose now to inquire in what respect it differs from, and in what respect it is like, the latter.
It differs from the old system, in that, —
(1) Being created by national instead of State authority, it is entirely within the control of Congress, which, according to the last section of the National Bank Act, may at any time "alter, amend, or repeal it."
(2) It differs, in that all the notes issued are guaranteed as to their ultimate redemption by the government of the United States. This provision we presume to be unique, and without any precedent; for the government is not simply a trustee, holding security for these notes, as in New York and some other States, on the safety-fund principle, where stocks are deposited to secure the circulation, but it absolutely guarantees the final payment of all these notes in full.
Every banking association, on its organization, must deliver to the Treasurer of the United States the bonds of the United States bearing interest, and is then entitled to receive from the Comptroller of the Currency circulating notes of different denominations, in blank, equal in amount to ninety per cent of the current market value of the bonds so transferred, but not exceeding the par value of such bonds. In case the notes issued by the banks are not paid by them according to promise, the Comptroller may sell the bonds left as security, and redeem the notes, making up to the holders of the same any deficiency there may be in the securities. This, it will be seen, does not secure the immediate convertibility, but the ultimate redemption, of the circulation.
(3) It differs, again, in that these notes are legal tender in payment of "taxes, excises, public lands, and all other dues to the United States, except for duties," and also are legal tender by the United States in payment of all salaries and other demands owing by the United States, except interest upon the public debt; but they are not a legal tender as between other parties.
(4) Unlike the State-bank notes, those of the national banks, owing to the provision just mentioned, will doubtless have a nearly uniform value in all parts of the United States, and will therefore be generally acceptable as currency.
(5) They differ also in this, that the national banks are compelled by law to keep on hand a certain proportion of "lawful money" to their circulation and deposits. In specified cities,* this proportion is fixed at twenty-five per cent; in all other places, at fifteen.
* These cities are St. Louis, Louisville, Chicago, Detroit, Milwaukie, New Orleans, Cincinnati, Cleveland, Pittsburgh, Baltimore, Philadelphia, Boston, New York, Albany, Leavenworth, San Francisco, and Washington City.
Under the State systems, there was no legal obligation on the banks to keep any specie whatever, except in a few cases, as in Louisiana and (recently) in Massachusetts, and one or two other States. But this provision in regard to the national banks is practically, to a great extent, only a nominal matter, because the law provides that "bank balances and clearing-house certificates shall be deemed to be lawful money;" and therefore, as these balances may be created fictitiously for the very purpose, the clause obliging the banks to keep a certain proportion of "lawful money" with which to redeem their notes is nearly a nullity. However real these bank balances may be, they are not specie, but, as we have before shown, constitute the most dangerous and explosive element of a mixed currency.
This is one of the great defects of the law, and, until it is removed by the repeal of this provision, would alone make the system a dangerous and unreliable one. Let us look for a moment at the manner in which it may operate.
The Merchants' Bank, Baltimore, has a balance against the Chemical Bank, New York, for twenty thousand dollars. The latter bank has a balance against the Globe Bank, Boston, for twenty thousand dollars. The Globe has a balance against the Merchants' Bank, Baltimore, for twenty thousand dollars. Here is sixty thousand dollars in this circle, which is to be reckoned as equal to so much specie, or lawful money. But is it so? So far from giving any strength to the currency, it has the opposite effect. The object of requiring any specie, or lawful money, is, that the currency may be made more reliable; but, if so, does not this provision, to a large extent, frustrate that object? So far from giving strength, every banker knows that these balances are a cause of weakness and peril in time of panic.
It can easily be seen that a very large proportion of the nominal amount of specie or lawful money required may be held in these "balances."
Lastly, the national differ from the old State banks in this, that the latter had almost their entire capital to loan to the business community, while the new banks will have little or none at all, having loaned their capital at the outset to the government, by the purchase of its bonds. They can, therefore, only loan their credit, in the shape of circulation endorsed by the government, together with their deposits.