CHAPTER VI. EXAMINATION OF THE COMMON OPINION THAT BANKS CREATE CAPITAL.

A VERY general error prevails with the public, arising from a want of analytical examination of the subject, which is, that banks have the power to create capital. As this error lies at the bottom of the whole system of false reasoning with which the speeches in legislative bodies, and the columns of newspapers are filled, and as its eradication is of vital importance to the country, and must precede any real reform in the banking system, I shall enter in detail into its investigation, and solicit the reader’s particular attention.

What is capital? The capital of a community is that aggregate mass of things possessing exchangeable value, which are destined to supply the necessaries, the comforts, and the luxuries of life, or, which are intended to be employed in the production of other things with such ultimate view. Hence lands, houses, workshops, factories, rail-roads, canals, provisions, clothing, fuel, merchandise, raw materials of every kind, ships, utensils, machinery, and other such articles, including gold and silver, are capital. If the farmer wishes to cultivate more fields, or to cultivate his present fields more highly, or to make improvements on his farm, or extend his operations in any way, the capital he stands in need of, is land, cattle, horses, sheep, implements, seed, food and clothing. If a manufacturer desires to enlarge his operations, he requires buildings, machinery, raw materials, and subsistence for his workmen. If a merchant proposes to extend his commerce, he wants ships, cargoes of agricultural produce, or merchandise, and provisions for his crew. The money which is wanted by each of these operators to deal with, as well as to pay the wages of those whom he employs, is only the instrument by which he and his laborers are enabled to procure some of the articles above enumerated, so that it is manifest that the power of any given population to set additional industry in motion, is limited by the amount of its capital as above described. Now it is very evident, that the mere emission of bank notes adds nothing to the mass of capital previously existing. It creates neither lands, houses, machinery, ships, raw materials, provisions, raiment, gold, silver, or any other conceivable thing that comes under the denomination of capital. In fact, a bank note is nothing but a promise to deliver on demand a certain quantity of gold or silver which is capital, and it is easily to he seen, that a promise to deliver capital is not capital itself, and that no conceivable number of such promises can ever constitute one atom of the thing promised. As well might it be asserted to a hungry man, that a baker’s promise to deliver a loaf of bread, was bread itself, or to a shivering man on a cold day, that a tailor’s promise to deliver a suit of clothes would protect him from the weather as well as the suit itself. The matter is so plain, that no one can fail to perceive the truth of these positions.

How then, it may be asked, do the issues of paper credits by banks of circulation operate upon the community, and produce that appearance of increasing wealth in places where they have been established? This is an important question, and if closely examined, will be found to lead to an answer, calculated to dispel much of the delusion under which the public labors, as to a supposed magic power of production conferred upon a number of individuals by an act of incorporation. It is this. These issues facilitate the transfer of the existing capital, that is, of things possessing exchangeable value, by creating an additional set of dealers with bank notes in their hands, and who are thereby enabled to purchase with the credit of the bank, what they could not purchase so conveniently with their own credit. A bank note indeed may be considered as a draft in favor of the borrower, given by a bank upon the public at large, to deliver him a certain amount of capital of any description he may want; the bank promising any one who may honor its draft, to pay on demand an equal value in gold and silver. Or, the bank may be imagined as borrowing upon its promissory note, a certain amount of capital from A, and handing it over to B, taking in payment the promissory note of the latter, and charging a commission for its agency. That this is the case, will be made plain from the following statement.

Let us suppose a bank with a capital of one million of dollars. After this is all loaned out, it is very evident that the bank has no more capital to lend. A offers a note for discount, having sixty days to run, for one thousand dollars, and the bank discounts it, by giving one thousand dollars of its own notes payable on demand.* These notes, as I have shown, are not capital, but a promise to deliver capital, and it is only because the bank supposes that no demand will be made upon it before the expiration of sixty days, when A’s note will become due, that it considers itself safe in exchanging notes with A for that length of time. If the notes come back for payment before A’s note is paid, it is evident that the bank cannot fulfil its promises to deliver capital, without borrowing from same one else, or without compelling some of its other debtors to pay, and what is true of A’s note is true of all the other notes which the bank may discount in exchange for its own notes.

A then, it is clear, has not borrowed capital of the bank, as all the other borrowers did who preceded him. He has merely borrowed the credit of the bank. And the question may now be very naturally asked, why should he be willing to borrow the credit of the bank at the rate of six per cent, per annum, when he has found his own credit so good that the bank would take it, as is proved by their trusting him for sixty days with one thousand dollars of their notes? The answer to this question is, that the credit of the bank is of greater notoriety than the credit of A. Every body will trust the bank because its capital is known, or assumed to exist, and because every body has heard of the bank, and has not heard of A, and consequently there are persons who will trust the bank, who would not trust A; or, because a confidence exists, that a bank note will, for an indefinite period, continue to pass from hand to hand, as equivalent to the metal, which, upon its face, it promises to pay on demand. This universal confidence in the credit of the bank it is, in connection with the known fact, that these notes will pay the debts due to the bank for the million of dollars first loaned as readily as gold and silver, which renders them universally receivable; and as every body who holds them knows that he can at any time procure whatever he wishes to buy with them, no one is in a hurry to send them in for payment, and on that account they remain out in circulation for a long or short time, by which the bank gains interest, whilst the holders of its notes lose no more than they would lose upon an equal balance kept on hand in gold or silver. But there is another reason why the credit of the bank is worth at least a part of the price which A pays for it. It is susceptible like coins, of divisions and sub-divisions into very small fractions, whilst security is afforded for punctual payment by the perpetual succession incident to a charter, or by the survivorship of one or more of several copartners, and facilities are granted by having certain hours on each day at which payment may be demanded, so that no time is lost in making a second or third call, which would be very apt to happen with the notes of individuals not acting as bankers. Perhaps the certain knowledge of the fact that banks during certain hours are to be found open and ready to meet demands without a moment’s delay, does as much to keep their notes out in circulation as any thing else; for any one can see, if there were no banking hours, and if a call might have to be repeated, people at a distance would receive notes with reluctance, and would send them in for payment before they actually needed the money, for fear of disappointment on the day it was wanted.

But it may be said that A, when he got his note discounted, did not want to purchase goods by retail, but by wholesale, and that therefore, he gained nothing by the privilege he possessed of taking small bank notes. Why did he not then purchase the goods he wanted of the holder directly by using his own credit and giving his own note, instead of giving the bank one per cent., the discount of his note for sixty days, for the use of their notes? I answer for the very simple reason, that he found that he could purchase goods with the credit of the bank upon better terms than he could upon his own credit. Upon no other principle would he have gone to the bank for a discount; for surely no man would give one per cent, to a bank for swapping notes for one thousand dollars if the bank’s notes would not buy more than his own individual note at sixty days for a thousand dollars would buy. If it should be said that the object of A in getting the discount was to pay an old debt, the case would not be altered. The credit of the bank is worth to him in this case as much as in the former, the creditor being willing to receive it as money, for the same reason that the sellers of goods above referred to were willing to receive it, because its notoriety rendered it universally receivable by others.

In no case then can the issues of a bank of circulation constitute capital; and we think the reader will now be ready to acknowledge, that all that a bank of circulation does effect, is the mere lending of its credit to individuals, to enable them to procure upon better terms, and in a more expeditious and convenient mode, the capital of others, than they could with their own credit Whether this facility be beneficial or otherwise will appear hereafter.