G.—Essay on Unlimited Liability, by James Cox, Esq

G.

ON UNLIMITED LIABILITY.

By James Cox Esq. of Philadelphia.

THE question of the extent of the liability of individuals, and of their natural right to limit that liability, is one which, in its moral as well as in its economical aspects and relations, is of the highest interest and importance, and the satisfactory solution of which is intimately connected with the investigation of those general and fundamental principles of justice and of expediency, which should form the basis of all positive enactments.

Prominent among the many plausible yet shallow fallacies which have, with a zeal and a perseverance worthy of a better cause, been urged in favor of the device of a limitation of individual liability—of a restriction upon personal responsibility—is the vain and contradictory assumption that the adoption and extension of this system of restraints is required by an enlightened adherence to the doctrines of the free trade theory—a theory in the general truth of the conclusions of which there is, as we think, no sufficient reason to doubt.

What would be the condition of individuals living in a state of the largest liberty consistent with the protection of each in the enjoyment of his natural rights, and under the control of no laws except such as might be necessary to enforce that performance of engagements which is required by a regard to the paramount obligations of morality, and to the demands of justice? A. B. and C. would, as it is perfectly manifest, trade with each other upon the condition of the natural and unlimited liability of each. And should A. B. and C. associate together in order to trade with D. E. and F., it would still, in strict conformity with the moral law, be upon the basis of the natural and unrestrained responsibility of each, not merely for the consequences of his own individual actions, but for those of the association of which he was a member. And from this condition of natural and inherent obligation, from this state of subjection to the moral law, neither A. B. nor C. could, by his own unaided act or by his individual effort, liberate himself. To effect this, the efficacy of positive enactments must be called to his assistance. Recourse must be had to far fetched and fanciful analogies, to subtile refinements and to legal figments. Privilege usurps the place of right. Rights cease to be enjoyed upon the only proper condition of the full performance of duties. Perfect freedom is no longer demanded upon the sole ground of perfect responsibility. Liberty and liability are rent asunder; an appeal must be made to the legislative power to put a limitation upon that which was before unlimited—to restrict that which, in a state of freedom, was unrestrained. The very expression of “limited liability” betrays the weakness of the argument; whilst it suggests, and of necessity implies, from the force of the terms, the idea, not of freedom, but of restraint and of restriction.

We are thus irresistibly led to the conclusion that the fancied advocacy of the right freely to trade in commodities, resolves itself into an argument for the limitation of that which, but for the intervention of the law, and the interference of the law-makers, would be unlimited—for the restriction of that which, in the absence of positive and special enactments, would be unrestricted. The argument for restraints is not the less remarkable as occasionally proceeding from those who thrust themselves forward as the select and chosen champions of the beneficent doctrines of commercial freedom; and who complacently assume to themselves the character of the freest of the free.

“There seems to prevail,” says Mr. Tooke, “among those who incline to the introduction of the commandites” (or limited liability) “system, a vague notice that something like a right exists, on the part of individuals, to circumscribe their liability” * * “and that it is only by the special interference of the law of partnership that they are prevented from exercising that right, that the law is an interference with what would otherwise be the free, and probably, therefore, the best direction of capital in trade.” * * * “On the slightest reflection, however, it must be obvious that the commandite is a privilege, and has not the shadow of foundation as a natural right. The general if not universal, rule of commercial transactions is, that the individual is liable to the full extent of his means, for the engagements entered into by himself, or on his behalf, or jointly with others, and it is only by the intervention of a special law that he can be shielded from the more general one.” And whilst this interposition must be considered as granting “a privilege, it operates as a distinct inducement—a premium—to individuals to employ the inferior, instead of the better instrument for carrying on the trade of the country.”

But, possibly, it may be objected that individuals are at liberty, by mutual agreement, to limit their responsibility. This, however, in the sense intended, is a mere groundless assertion, without force or foundation. For, although it should be admitted that an individual may, in the performance of a specific contract, limit his liability to the extent of the pledged security, it would by no means necessarily follow that he can thus restrict and restrain his general liability. This liability, as we have seen, is the result of natural obligation. It arises from the operation of the moral law. It is binding upon the one party, from the mere force of moral considerations; and it is entirely independent of the claim of the other party. It results from the very nature of man as a moral agent. To be relieved from its practical operation recourse must be had to artificial distinctions, and to legal fictions. The proposition attempted to be sustained is neither more nor less than that men are born under a liability even less than that of corporations. For the latter being, by a legal refinement, considered as artificial persons, are responsible to the whole extent of their corporate property. It is true that the most ready resources of these artificial persons are frequently found to consist in an available fund of public credulity.

“If it should be urged that when a person intrusts property to another, he knowingly undertakes the risk of that other’s insolvency, and that if the contingent loss happens, he has no claims to justice on the other, the answer is this: that whatever may be thought of these claims, they are not the grounds upon which the debtor is obliged to pay. The debtor always engages to pay, and the engagement is enforced by morality: the engagement, therefore, is binding, whatever risk another man may incur by relying upon it. The causes which have occasioned a person’s insolvency, although they greatly affect his character, do not affect his obligations; the duty to repay when he has the power is the same; whether the insolvency was occasioned by his fault or his misfortune.” Being then able to pay, “does the legal discharge exempt him from the obligation to pay? No: and for this reason, that the legal discharge is not a moral discharge; that as the duty to pay at all was not founded primarily on the law,” the law cannot cancel the obligation.

If then individuals can, under no circumstances, except those of a distinct and special contract, be justified in limiting their responsibility to each other, much less can they limit it in reference to third parties, and least of all, can the banker and the bank debtor have, as has been most absurdly assumed, a natural and indefeasible right to impose, for the promotion of their own interested and sordid purposes, upon whole classes—upon the mass of the community—the absolute necessity of receiving, in payment of their dues, the promissory notes of associations made up of irresponsible persons. And vain and frivolous is the assertion that, as bank notes are not a legal tender, their circulation is the consequence of their voluntary reception. For, whatever bank notes may be by law, it cannot be denied that they are virtually, practically, and in fact, a legal tender. In cases innumerable there is no option, and their circulation is thus made compulsory. As is notorious, the great mass of the people are, at all times, totally without power to refuse them. Paper forms almost the whole of the circulating medium, and the only real alternative offered to a large proportion of the laboring and mechanical classes is to accept of bank notes, or to cease from their occupations. Thus there is resting upon the supreme authority the same obligation to prevent the circulation of worthless paper, as there is to preserve the purity of the coin. And the duty is the more binding, inasmuch as the country has sustained far more injury from the issue of fraudulent promises, than from the circulation of base coin. The great “commodity of contract” should not be left to fluctuate in value at the caprice, or to gratify the cupidity of irresponsible or unprincipled parties.

Obligation is involved in the very nature of that which is morally good. “Obligation to action and rectitude of action are obviously coincident and identical.” If men are morally responsible for the consequences of their own actions, and for those of their agents, (a proposition which will hardly be contested,) then should the legal liability be commensurate with the moral obligation.

But it has been said: “Grant to your neighbor the same secure exercise of the rights of person and of property that you desire for yourself.” And again: “if the abolition of restrictions will tend to enable men more rapidly to improve their condition, there can be no moral objection to the passage of a law granting to all men permission to trade with each other upon such terms as they may agree upon among themselves.” That is to say: secure to others, by means of positive enactments directly at variance with all sound and settled principles of moral and inherent accountability, the same legal exemption from the performance of duty—the same licence to disregard the requirements of moral rectitude—which you desire for yourself, and the climax of perfect freedom will then be attained. A will be at liberty to defraud B, because B will be free to cheat C, who, in his turn, may, with impunity, defraud A. The reciprocation of dishonesty is thus made perfect—the circle of deceit is complete. Than which, we are told, “nothing would tend more to promote the cause of morality!”

It is not at all surprising that such a chain of argument should assume, as its first link, the truth of the proposition that “the abolition of restrictions,” by which is intended the granting of exemptions, “will tend to enable men more rapidly to improve their condition;” thus proving the point at issue, by simply taking it for granted; and instead of reasoning directly for the expediency of a measure from its justice, adopting the inverted process—the retrograde and crab-like procedure of inferring its justice from its assumed expediency. Neither, under the circumstances, need it be an occasion of wonder, that whilst men are discoursing upon the truth and beneficent tendency of the doctrines of free trade, and expatiating upon the advantages to ensue to society from “the abolition of restrictions,” they should also be found pleading for “the passage of a law granting to all men” exemptions, to which, in the absence of all interference, on the part of the law-makers, with the natural state of perfect freedom upon the natural condition of perfect responsibility, they could make no valid claim whatever.

The doctrine of a limitation of liability thus strikes, as it is perfectly plain, at the very foundations of moral rectitude. It assumes the right of individuals to release themselves, and the possibility of their being released by others, from the bond of moral obligation; of being relieved from all other than a very limited measure of responsibility for the consequences of their own acts, or of those of their authorised and accredited agents. An assumption, as we have just seen, as little in accordance with sound principles of integrity, as it is irreconcilable with an unreserved obedience to positive precepts of the highest possible authority. The dogma has as slender a basis in natural equity, as it derives little support from enlightened views of expediency. Hence the entire correctness of the remark of a practical banker, of excellent understanding and of great experience, that “the commandite principle seems to involve something very nearly approaching to injustice, inasmuch as in the case of the insolvency of a concern, it tends to remove a portion of the loss, which must be borne by some party, from those who have voluntarily engaged in the concern, who have had the means of watching and controlling its progress, and who would have been the sole participators in the benefits of its success, for the purpose of throwing it upon those who had no means of insight into the state of the concern, no power over the management of it, and no share in its advantage. The partners may be but slightly injured, whilst the creditors are ruined. The difficulties too of guarding against fraud and intricate legislation are very great.” And where these difficulties have been in any considerable degree surmounted, it has usually been only by subjecting the privilege to such qualifications, and by imposing upon the exemption itself such restraints as have rendered it almost nugatory and altogether unacceptable to the parties desiring to profit by the limitation of their natural liability.

If such, then, is the true character of all devices intended to limit the liability of individuals, to put restraints upon the responsibility of moral agents, and to grant legal exemptions from the weight of natural obligations, how happens it that “the nicest conscience is not offended by holding stock in incorporated institutions?” The answer, in its application to incorporations for trading and banking purposes, the only description of associations contemplated, is obvious. Even of conscientious persons, some have never had the subject practically brought home to them—have never had their attention aroused and stimulated to a serious investigation of the merits of the question. Some are unconsciously biassed and swayed by interested motives; or they are influenced by plausible fallacies and by specious sophistries. Many are content to take things as they find them, without being at the pains to inquire into the truth of what they may persuade themselves are merely theoretical refinements and metaphysical abstractions. And of all it may be affirmed, such is the wide spread sway of vicious legislation, and especially in relation to the right to issue currency, that a strict adherence to undoubted principles—a rigid observance of maxims which, in a different and a better state of society, would bind the conscience—becomes, in a great degree, impracticable and superorogatory.

Whilst the objection noticed, furnishes not even a palliation, much less a justification of a system equally at variance with the dictates of justice, with the promptings of expediency, and with that natural order of things to advocate and to sustain which is the aim and the object of the political philosopher, it affords one of the strongest arguments against the prolonged existence of a policy fraught with evils of such magnitude, and obnoxious to objections so serious.

The efficient principle of liability thus brought into view is one highly conservative, and from the free and unrestrained operation of which individuals, neither singly nor in their associate capacity, should ever be permitted to feel themselves emancipated. Upon its uncontrolled influence, in conjunction with that of its antagonist principle—the love of gain—depend the strength and conclusiveness of the arguments in support of the beneficent doctrines of commercial freedom.

Free trade may be defined to be that system, under which every one is left in the enjoyment of his natural liberty of making such a disposition of his property, and of giving such a direction to his industry, as may to himself appear most conducive to his interests. It is that state of the law in which men, subject merely to the requirements of truth and of justice, are allowed to trade together as they like, it being reasonably presumed that, in the vast majority of cases, individual sagacity, sharpened by competition and by individual interest, will secure to the community the ultimate attainment of results more positively and diffusively beneficial, than can possibly flow from the interference of the (so called) collective wisdom of legislators. Upon the “tentative” efforts of interested parties reliance may securely be reposed for a satisfactory adjustment of conflicting claims, and for the establishment and continuance of that natural order of things which alone can be permanently and generally advantageous. This freedom, however, degenerates into a wild and unrestrained licence; individual sagacity ceases to be a solid and secure ground of confidence, when any one of the leading and influential principles, by which moral and responsible agents are governed, is impaired or weakened in its natural and healthy action—when men cease to be, under all contingencies, answerable for their doings—when the love of gain is inordinately stimulated by the hope of high profits; whilst the fear of loss is banished by the facility with which much of that loss may be thrown upon others—upon those who, under no circumstances, would have participated in the gains. The natural equilibrium of wisely balanced motives is disturbed. The just equipoise of conflicting influences is destroyed. The spirit of enterprise is unduly excited, and the public is thus deprived of the stability and security resulting from the salutary operation of a natural principle—the fear of loss—implanted in our natures for wise purposes; and which, in all cases of individual risk, undertaken and prosecuted under a sense of unlimited individual liability, constitutes a most wholesome restraint upon every scheme of doubtful utility—upon every project of questionable legality.

Thus it is that a writer, displaying a perfect familiarity with all the practical details of the subject, as well as a full comprehension of the great moral and economical principles involved in its discussion, adverting to the admitted truth that the spirit of speculation is already “too strong,” expresses his convictions in the following unreserved language: “Great danger is to be apprehended from any step that would tend to give unnatural inducement to persons not bred to, and not acquainted with mercantile pursuits, to embark their property in such concerns. Without the least hesitation, I pronounce it to be a scheme full of danger to the interests of the commerce and manufactures of this country,” (England) “placing them in a position of extreme hazard and likely to produce the most extensive mischief, if adopted.” And again: “Any thing that would attract capital in an unnatural way to speculative objects, I consider to be very disadvantageous.” And he concludes his summary of objections against the scheme with the observation that: “In my opinion there is no sound or safe system that can admit of limited liability.”

So also a practical and most judicious writer of ample experience, and enjoying every opportunity of the most extended observation: “In proportion as the consequences of failure are rendered less serious, must we not expect that concerns will be undertaken with a more speculative feeling, and be conducted with less vigilance and sobriety? We should consider well the tendency which the sense of limited responsibility has to elicit the spirit of gambling.”

As the principle of the limitation of the liability of individuals is thus obnoxious to the heaviest objections on the score of its evident and injurious tendency to promote an artificial distribution of the national capital, and thus to diminish its productiveness and to prevent its rapid accumulation, thereby retarding the natural progress of society, so its influence is no less sinister upon the moral and intellectual character of individuals. “Removing the risk of general liability would, in the existing state of society, have a tendency to separate still more than they are now, the partner bringing capital from the partner bringing labor. The idleness of the capitalist is now checked by the risk in which it involves the monied partners. The natural laziness of mankind would induce capitalists to unite in large partnerships for the most ordinary business matters, doing little or nothing themselves; and leaving the management to subalterns. The check upon this is the unlimited liability under the existing law, and the result of thus superseding industry in the principal, would be to deteriorate the talents and characters of the mercantile and manufacturing classes.” The question, too, it may be added in the words of an eminent moralist, “is not whether some men,” in view of the risks to be incurred, “would not prefer indolence to the calls of justice,”now so commonly disregarded, “but whether the public should judge accurately respecting what those calls are.”

If then the principles of free trade, which are but the principles of justice, of equality and of common sense, do not admit of unnecessary restraints upon the liberty of human action, much less, when properly understood, can they sanction or tolerate a limitation of individual liability.

The nature of the arguments frequently employed by the champions of the doctrine of a limitation of liability, especially in its application to associations of individuals for the manufacture and the issue of a paper currency, furnishes abundant evidence of the prevailing confusion of ideas in the discussion of economical questions; of the inability to discriminate between things possessing some few points of resemblance, yet in their real nature perfectly distinct; and of the too common deficiency of analytical sagacity, in considering as identical, propositions essentially different. Assuming, since it cannot be proved, that the opinion is correct that partnerships for commercial and manufacturing purposes—for dealing in commodities possessed of intrinsic value—for trading in corn, cotton or coin, may be safely and beneficially formed upon the principle of a limitation of liability; does it, there fore, follow that the same principle is equally applicable to associations for the manufacture and the issue of paper promises—of promises intended as a substitute for coin—of promises which, in the actual condition of affairs, no man can conveniently refuse, and which no man can, with entire safety, take? Is the grant of a bank credit, or the issue of a species of currency which, whilst it requires little expenditure of labor or of capital for its production, by the facility with which it is exchanged for articles possessed of intrinsic value, is in the highest degree profitable to the issuer, and thus holds out the strongest inducements to over-production, an overproduction, the constant tendency to which is feebly, if at all, restrained by the apprehension of the remote contingency of possible and ultimate loss—is this process to be compared with the production of commodities? Or is the trade in promises to be put upon the same footing with the exchange of material products—with the trade in real, not representative values? Is that which may be true of the substance, necessarily true of the shadow also?

The fallacy of the argument usually employed in the defence of a most pernicious and demoralizing doctrine, in its application to the question of the right to issue currency, consists in the dexterous employment of the term money in its double sense of coin, and of promises to pay coin. And, because it may possibly be admitted that the trade in coin, as in corn or in cotton, may properly be conducted upon certain principles, it is cunningly or ignorantly inferred that the same conclusion is applicable to the trade in promises. The truth of the proposition A is conceded, and the artifice or the blunder consists in taking for granted that the proposition B is identical with A, and that it is, therefore, equally true. This is one among the many instances of attempts, made by interested parties, or by deluded partisans, to mystify clearly ascertained principles, and to pervert established doctrines. If the major proposition is true, the minor is so also. If the trade in capital—if the borrowing and lending of coin, of metallic money possessed of intrinsic and indestructible value—cannot safely be allowed with a limitation of the liability of the dealers, much less can the trade in mere promises.

To the plan of subjecting associations for banking purposes to the regulation and restraint resulting from the natural and quiet operation of the equitable and salutary principle of the unlimited liability of individuals, it has been objected that the multiplication of banks being thereby effectually stayed, a wholesome competition is prevented.

The answer to this objection is as easy as it is conclusive. We assert, as that which cannot be disproved, that he multiplication of banks has no where been in this way improperly or unduly checked. On the contrary, under the application of the principle assailed and notwithstanding its assumed incompatibility with the freedom of the banking business, these establishments have not only increased in number, but their increase has been rapid, excessive and hurtful.

Thus, in Scotland, where joint stock banking companies are organised and administered upon the sound and salutary principle of the liability of each partner “to the whole extent of his fortune for whole debts of the company,” and where this liability of individuals furnishes to note-holders and depositors the firmest ground of confidence and of security, there are no fewer than 26 banks, with 314 branches. Eight of the former and 113 of the latter have been established since 1824; and such is their general diffusion over the country, that “there is scarcely a town, or even a village, into which branches of the Scotch banks, equivalent to so many separate and distinct banks have not penetrated.”

The consequence of this condition of the banking business is, that the dividends upon bank stock—the profits of the shareholders—are reduced to the lowest point consistent with the continued investment of capital in this department of commercial industry and enterprise. So little foundation is there for the positive assertions which have been so recklessly ventured as to the assumed necessity of holding out the expectation of exorbitant profits, as an inducement to capitalists to incur the risks of individual liability. It may, in truth, be questioned whether these risks have been practically at all increased; and whether the unrestrained responsibility of the parties has not been more than compensated by a commensurate increase of circumspection, of prudence, and of good management and by a consequent and coresponding enlargement of credit. Individual sagacity, in this as in all other analogous cases, has been sharpened, and individual caution has been stimulated by the absence of all positive and artificial restraints upon individual liability. Hence these banks are administered with a view to the promotion of the interests, not of the borrowers, as is too often the case in this country, but of the owners of bank capital. And there is no reason to believe that stockholders have in Scotland suffered as much as the same class of capitalists have endured in this country; whilst the losses of the public have been in a greatly diminished ratio.

Thus, also, in England where previous to 1826 companies for banking purposes were not allowed to consist of more than six partners, and where, as in Scotland, the unlimited liability of the associated individuals lies at the foundation of the system, such, since the repeal of the restriction upon the number of partners, has been the rapidity with which these associations have increased, that there were in 1836, in addition to several hundred private banks, 101 joint stock companies with very numerous branches. Of these 45 were registered in one year alone, and counting their branches “which are often removed from the parent establishment, and conduct all sorts of banking business, it may safely be affirmed that considerably more than 200 banking establishments were set on. foot in England and Wales in 1836.” Hence, whilst, by the most enlightened and strenuous advocates of the joint stock banking system, it has been freely and unreservedly admitted that “too many banks” have been established, by others, this increase has been represented as “alarming,” and the speculative spirit which thus developed itself, has been correctly characterised as a “mania,” to the prevalence of which there proved to be no serious obstacle, either in the unrestrained responsibility of the shareholder, or in the existence of a powerful national bank, possessed of monopoly privileges, and sustained by the whole force of government patronage and of government influence.

Are there not then, it may confidently be asked, ample and satisfactory reasons for admitting the entire propriety of the conclusion drawn by Mr. Quin, who, at the close of his most elaborate abstract and review of the evidence taken before the Parliamentary committee of 1832, remarks: “If men with sufficient capitals are already found in abundance disposed to embark in the banking trade at the risk of their own fortunes, there is no reason why speculators should be allowed to establish banks of issue upon a less responsible system.”

But again, we affirm, without the fear of refutation, that the beneficial tendency of competition to prevent excessive production, in its application to associations, not for the manufacture of articles requiring for their creation the expenditure of capital and the application of industry, but for the making and the issuing of currency of promises to pay—of paper costing comparatively nothing, has never yet been demonstrated. It has merely been taken for granted. In the case of commodities possessing not a representative, but an intrinsic value, the public are in general, secure from an over-production from the simple consideration that no man will knowingly continue to produce and to bring to market an article which does not realize to the producer the cost of production, together with at least the ordinary return upon the investment of capital, and the ordinary reward for the application of labor. And should an individual, from inexperience, from ignorance, or from any other cause, fall into the error of increasing the supply beyond the effective demand—beyond the demand of those able and willing to purchase, he would soon become satisfied of his mistake; and would be obliged, at his own expense, to correct the error. Now what is true of one individual is true of many. What is true of many, is true of the mass. Thus we may safely trust to “the spontaneous operation of private interests,” for the proper apportionment of the supply to the demand; and all interference of the governors with the governed must prove to be not merely ill advised and uncalled for, but ultimately and absolutely pernicious.

Widely different, however, is the case, when we proceed to an investigation of the causes which operate upon the manufacture of bank promises; to examine into the motives which influence in the issue of a currency possessed of little or no intrinsic value. Here the gain to the issuer is immediate, is considerable, is certain; whilst the cost of production is relatively insignificant, and the loss of profit consequent upon a re-action, is future, distant, contingent and uncertain. It may be avoided. It may be thrown, as it usually is, upon the shoulders of the public—and in few instances is the return of paper upon the issuer attended with a positive loss. Its effect is simply a diminution of anticipated profits. The actual loss is incurred by those bank debtors who may be compelled to make heavy sacrifices in order to sustain their credit and to honor their engagements; or by those bank creditors, who are in possession of obligations which are disregarded—of promises which are not performed. Thus there exists every inducement to banks to lend their credit, and to increase the supply of their paper; that is to say, there is every stimulus to an expansion; whilst, on the other hand, inasmuch as bank credit in the form of bank notes, so long at least as the ultimate solvency of a bank is thought not to be impaired, is to the borrower just as available as capital, the demand is limited only by the extent of the opportunities, or of the supposed opportunities, for profitably employing capital; that is to say, it is practically unlimited. “The constant tendency, therefore, of banks is to lend too much, and to put too many notes in circulation.”

Fancifully and absurdly to compare banks of issue—paper mints—to “shoe shops,” as has been done by some, and to assume that the one are subject to the same influences, and are governed by the same general laws as the other, may, to the unreflecting and to the superficial, present an appearance of plausibility and of acuteness; but to the mind of the philosophical inquirer, who perceives the entire absence of any analogy upon which to rest a parallelism of argument, such far-fetched comparisons can bring no conviction.

It is not merely a demonstrable truth, but a truth that has again and again been demonstrated, that banks issuing paper really and thoroughly convertible can neither expand nor contract the general mass of the currency to an amount permanently greater, or permanently less, than it would be with a medium exclusively metallic; and that, therefore, the average quantity of the currency, and consequently the average money values, or prices of real estate and of commodities generally, will in any given country be the same or nearly the same, whether the currency consists exclusively of convertible paper, or of coin; or whether it is compounded in any conceivable proportions of both. But it is equally true, in fact, it cannot be denied, that in this country the convertibility of paper is at all times exceedingly imperfect; and that there is constant danger of this imperfect convertibility ceasing altogether.

Neither, after the experience of all countries employing a paper medium, can there “any doubt be entertained that an excess of paper money, even when freely convertible into specie, may exist for some time unredressed; and although the check of convertibility must ultimately prevail, very considerable effects on prices may be produced in the interval.” And as this redundancy, however hurtful it may be, is surely and inevitably followed by a deficiency still more pernicious, “it is of great consequence that a paper currency should not only be subject to repression from without, but be placed under such a system of management as will prevent any excess in quantity from being issued.” But the only “system” which can possibly accomplish this most desirable object—the only policy at all entitled to be termed preventive—will be found to consist in an entire separation of the incompatible functions of banks of issue and of banks of discount. A paper currency, if such a currency is thought to be indispensable or desirable, should be furnished by banks purely of issue, automatically expanding and contracting the circulation simply in reference to the demand for paper in exchange for the precious metals and the demand for the metals in exchange for paper. On the other hand, commercial securities should be discounted, as is the practice in London, by banks not of issue, but of discount and deposite—by banks not “trenching on the perogatives of sovereignty by coining money“—but by banks which are properly mere borrowers and lenders of capital, and dealers in coin.

The functions of banks of discount are in their nature purely commercial, and the only supervision either necessary or justifiable on the part of government, is that the parties to contracts should be held strictly responsible for their performance. Banks of issue, on the contrary, cannot be kept too distinct in their operations not merely from all mercantile dealings, but they should be removed from all sympathy with money lenders and money borrowers.

The inevitable consequence of combining the issue of paper money with the proper and the appropriate business of banks of discount, is to aggravate commercial embarrassments, and to give redoubled intensity to commercial revulsions.

The system of paper money banking as it exists in this country, and the prominent feature of which is the confiding to associations of irresponsible traders and speculators the discharge of one of the most important and vital functions of sovereignty, and thus giving to interested parties the control over the great “commodity of contract,” is a system evil in its essence, vicious in its very constitution, and irremediably and irresistibly pernicious in its influences, tendencies and consequences.

In the fabrication and the issue of promises to pay there will be, as has been already shown, a constant tendency to excess, because the manufacture costs comparatively little or nothing; because the issue is highly lucrative; and because the performance of the promise can be evaded, and, as is perfectly notorious, constantly is evaded, whenever it becomes burdensome; or the burden will, at all events, be shifted to the shoulders of others. “Convertibility at the will of the holders, and a sense of this power in them, on the part of the issuer is not, as experience has proved and is proving, any restraint in the way of over-issue. It is not a preventive, but a painful method of cure.—And it appears to exercise no more influence on the mind of the issuer than the fear of future punishment is found to exercise on the majority of those who are in full possession of health and vigor.” On the contrary, the production and the supply of material commodities, possessed of intrinsic value, will not ordinarily be in excess; because the creation of such products involves an expenditure of capital, and the employment of industry; and because an excess in the supply, by causing a fall in price, whilst it benefits the consumer, entails a certain loss upon the producer.

But it is said that, under a system of free competition, banks of issue will effectually check each other, and thus prevent all undue expansions in the volume of the currency, and all injurious fluctuations in the value of its denominations.

Now, admitting, (the admission being in direct contradiction to all observation and to all experience,) that the banks of a community ordinarily act, not in combination and in concert, but in competition and in conflict with each other; still, as the object common to all banks, conducted with a reference to the promotion of the interests of the share holders, is, as far as possible, to extend their circulation and to lend their credit, and thus to swell their profits, this competition can manifestly have ultimately no other effect than to secure to each bank its just proportional share of the general circulating mass, and, also, its proportional share of any increase in that circulation—of any addition to the general mass; and the only consequence of an individual bank magnanimously declining to take its portion of growing profits, would be “that the rejected business would go to some other bank.”

Thus it is that, as with an expanding currency, banks emulously blow up the inflation, so, when the subsequent and surely consequent reaction has commenced, and when, from the external pressure of a demand for coin to be exported, constituting the only really operative check upon excessive issues, they are compelled to contract, they vie with each other in the haste with which they curtail. The competition, so far as it has an existence, consists at one time in a struggle to push out, and at another time in a convulsive effort to draw in as many notes as possible. This very elasticity of the circulation—this power of suddenly expanding and contracting its volume, which has so often been represented as forming one of its highest recommendations, thus rendering it eminently dangerous and explosive, and conferring upon it unequalled powers of mischief. This is the constitutional disease, the incurable taint inherent in the system, and against the destructive consequences of which no effective preventive has hitherto been, or is likely hereafter to be discovered, short of such a radical change as shall abolish the exercise of the abstract right to issue, and thus suppress all paper money; or as shall bring about an entire and complete separation between the conflicting, the incompatible and the irreconcilable functions of banks of issue and of banks of discount—of issuers of currency and of mere dealers in capital. Hence the entire correctness of the observation of one of the most able of our own writers, and one, too, of the most discriminating and logical of reasoners: “That the general tendency to an expansion of the currency, to be succeeded of course by a contraction of it, is much more considerable where many than where a few banks are competing with each other to obtain as large a portion of the circulation as they respectively can.” Hence, also, the justness of the conclusion of a foreign authority: “That the more banks are multiplied, the greater is the chance of fluctuations in their issues, and consequently in prices, credit and so forth.” It is not, on that account, the less true that so long as the system is allowed to exist, in the language of the same distinguished economist, “ If the names of the partners in deposite banks, or in banks issuing notes on security, be given; and if these partners be bound jointly and severally to the whole extent of their fortunes for their engagements, nothing more can be done by law for the protection of the public interests. Every thing else should be left to individual sagacity and prudence.”

Thus the guarantee against abuses, as it is perfectly evident, is found not in the competition, but in the thorough responsibility of the parties for whose benefit the issues are made, and who derive the whole of the profit accruing from the gainful process of converting paper into money—of exchanging promises for commodities.

In this unrestrained responsibility, and not, as is frequently and absurdly taken for granted, in any amount of competition real or imaginary, lies much of the secret of the comparative stability, solidity and security of the Scotch banking associations. To insist, however, upon the interference of the Legislature to regulate the number of banks, as it would be justly liable to other objections, so it would be to advocate the odious scheme of granting monopolies and exclusive privileges; and to all the evils inherent in our present vicious banking system, to add the abuses of special and of partial legislation. “The proper objects of government,” as stated by a writer of the most penetrating sagacity, and one of the most powerful and conclusive reasoners in favor of the free trade theory, “are to provide that paper money be perfectly secure, and at all times convertible into the coin which it represents; and that the danger of over issues should be met by adequate preventive, or remedial checks.” And as remarked by another economist, as the result of the most matured experience and of the closest observation: “The knowledge of who the partners are in a bank, and their unlimited responsibility, are the only securities that, speaking generally, are worth a pinch of snuff. If these cannot protect the public from fraud or loss, nothing else will; and the question will come to be, not whether the system should be reformed, but whether it should be abated as an incurable nuisance.” In the language of Mr. Ricardo: “Is it not inconsistent that government should use its power to protect the community from the loss of one shilling in a guinea, but does not interfere to protect them from the loss of the whole twenty shillings in a one pound note.”

To exonerate individual partners from the payment of partnership debts, is to encourage both rashness and fraud. “Under any circumstances,” in the words of an able writer and experienced banker, “it seems inexpedient, as regards the public, and unjust as regards private bankers, to favor especially joint stock banks, by making a particular law in their behalf.” And the practical operation of a legislative act granting to associated parties the privileges and the immunities conferred by their being invested with the corporate character is, that “they may contract debts to any amount, while they are bound to pay only to a specific amount; their charters thus vitiating the fundamental principle of all business, and the essence of all confidence, viz: the integrity of contracts. This surely may be termed a premium upon great villany.”

In favor of individuals and of associations of individuals. the claim has been advanced that they have the right to issue their paper promises intended as a substitute, and in fact, forming a substitute for the coin of the country—for the currency of the constitution.

As a mere theoretical question—a metaphysical abstraction, it may, perhaps, be admitted that such a right may be classed among those which have been termed natural. A similar concession might be made as to the right to coin metallic money. It is not, however, the less true that both the justice and the expediency of the unrestrained and unconditional exercise of the right has been assumed, rather than attempted to be proved. In former and in barbarous ages, powerful individuals have been allowed to coin money; but at more civilized periods, and among enlightened nations, the right to coin has always and everywhere been assumed and exercised by the supreme authority, to the entire exclusion of all participation of individuals in the discharge of a function properly described as sovereign. Hence, although it may be pushing the argument too far to assert that there are “no grounds for any claim of natural right in any individual to furnish, by his own notes, the whole or any part of the currency of the country,” it is undoubtedly true that the argument in favor of the policy of government assuming to itself the exclusive control over the metallic money of the country, is, at least, equally conclusive against allowing individuals to manufacture and to issue that which forms, and which is intended to form, the almost universal substitute for that money.

Thus the right to issue the substitutes for metallic money, intended to circulate in the place, and as the representatives of the precious metals, can be derived only from the right to coin that metallic money. “The exclusive power of regulating the metallic currency of the country would seem necessarily to imply, or more properly to include, as part of itself, a power to decide how far that currency should be exclusive—how far any substitute should interfere with it, and what that substitute should be.” If this were not true, it must necessarily follow that the prerogative of coining money, which has every where been exercised by the sovereignty, might be restrained, impeded, counteracted and defeated by the action of individuals or of associations. In the words of Mr. Tooke, a practical and scientific writer of the highest reputation: “Hitherto the legislature has restricted individuals under the severest penalties, from establishing private mints, and uttering metallic money of intrinsic and indestructible value; yet, with a degree of inconsistency which strikes us as most extraordinary the more attentively we consider it, our law-makers have permitted individuals to establish private banks of circulation—and to utter paper money which a breath of panic may at any time destroy. On the same principle that the government protects the public against the probable insecurity which might arise from individuals being permitted to utter metallic currency, it should guard against the more probable, nay certain insecurity which is created when individuals utter a paper currency. In every civilized country, supplying and regulating the circulating medium is a function of the sovereign prerogative.” And the author of the admirable “Essay on Value,” who is among the most able and zealous of the advocates of the doctrines of free trade in their widest application, states it as an obvious and incontestable truth, that government having undertaken the supply of the currency, “in order to facilitate or insure the accomplishment of its purposes, private persons may be very properly restrained from any proceedings which would tend to defeat them.” * * * * “If then government has determined, for any reason, to have a metallic currency, consisting of certain coins, here would be a plain ground for restricting the dealer in money from such issues of paper as would defeat the design.”

“The business of banking,” observes an acnte reasoner and a practical banker, “is one thing; that of issuing a paper money is another thing. There is no necessary connection between the two. The bankers in London and Paris are bankers strictly so called. They are lenders of their own and other people’s money. They must obtain it by industry or by loan, before they can lend it. They do not make it. The business of making and then issuing a paper money on loan is very different from that of obtaining a paper money on loan, and then re-lending it.” The two operations, although thus clearly distinct and widely different, are, by those who find their account in the present vicious system, sedulously sought to be confounded. To banks of issue is confided the creation of the circulating medium. The office of banks of discount is to assist in the distribution of that medium. The duty of the former is to issue the circulation upon such principles as shall cause its amount, and the value of its denominations to vary, as they would, were the currency metallic. The only object of the latter is so to use their available funds, as to secure upon their employment the highest rate of profit.

Thus it is that in all civilized countries the issue of notes for circulation is always with the consent, express or implied, of the supreme authority, which, at its discretion, regulates and restrains this issue. Hence in all cases in which the discharge of this important function has been committed to individuals, or to associations, there arise the questions—What are the conditions upon which the trust shall be delegated? What are the regulations and restraints proper to be imposed for the protection of the public? Evidently such, and such only, as, while they interfere in the smallest possible degree with the free application of capital, and the natural direction of industry shall have for their object to assimilate, in all desirable properties, these issues to a currency composed of the precious metals, and as far as practicable to confer upon the former the steadiness and the stability in value which, being inherent in the latter, have made them the universally received medium of exchange, and the “commodity of contract” preferred to all others. Prominent and most efficacious among these conditions is the unlimited individual liability of the issuing parties.

Let it be observed, however, that whilst the unlimited responsibility of individuals is, with entire propriety, represented as furnishing to the public a very strong guarantee against fraud; and as holding out to noteholders and to depositors increased protection against all danger of ultimate loss; the principle affords little or no security against those alternate expansions and contractions in the volume of the currency, and those fluctuations in the value or purchasing power of its denominations, which tend to give to all commercial undertakings a gambling character; but which are inseparable from the issue, by trading associations, of paper substitutes for metallic money; and which necessarily flow from a system of banking and of currency essentially vicious in its constitution, and defective in the very elements of its organisation. We admit the correctness of the assertion of Sir H. Parnell: “That all the public has lost by bank failures in Scotland, since banks were first established, amounts to £36,444, and that no such thing ever occurs in Scotland as a panic.” We are satisfied of the truth of the facts stated by Mr. M’Culloch, that “In 1793 and in 1825, when so many of the English country banks were swept off, there was not a single establishment in Scotland that gave way.” And we may very satisfactorily account for much of this superior stability, by the then greater freedom in Scotland of the banking business: this freedom being enjoyed upon the only proper condition of the thorough responsibility of the associated parties. We are convinced of the accuracy of the statement made by the first Lord of the Treasury and by the Chancellor of the English Exchequer: “That the Scotch banks have stood firm amidst all the convulsions in the money market in England.” It is, no doubt, true, as affirmed by Mr. Gilbart, a bank manager of great experience and a practical writer of established reputation, that “The enactment which renders the whole property of every shareholder answerable for the debts of the bank is very just and satisfactory. It is satisfactory to the public and satisfactory to the shareholder.” It can not be denied that whilst in 1837 and 1838, bank creditors were every where in this country defrauded by the depreciation of bank paper, and by the non performance of bank promises; and whilst the same thing has again partially occurred in 1839; in Great Britain “neither depositors nor noteholders have lost a shilling.” Mr. Bailey, a writer of the very highest character for power of logical discrimination, and for penetrating sagacity and analytical skill, is clearly in the right when he asserts that the legislature “acted wisely in not interfering to lessen,” by the grant of exceptions, “the liability of individuals.” Mr. Norman, a prominent director of the Bank of England and a writer of signal ability, was, no doubt, correctly informed, when he admitted the “general solidity of the Scotch banks,” when he stated, that “insolvency was almost unknown among them;” and when he referred to their well established reputation as “secure places of deposite.”

All these authorities (and their number might easily be extended) are direct in the testimony which they bear to the justice and the expediency of the principle of the unrestrained liability of individuals; and their evidence is conclusive as to the beneficial nature of the results springing from its practical application. It is, however, not on that account the less true that the only infallible test of the soundness of any scheme of paper issues, is to be found in the identity of the phenomena with those which would take place with a currency purely and exclusively metallic, and “it is as issuers of paper money that the Scotch banks are chiefly open to criticism. In times of prosperity they push out their notes and credits to an undue extent, and are consequently compelled to diminish them as violently when circumstances alter—thus in flirting on the public oscillations in the currency much more violent than could occur with a metallic circulation, or with paper regulated on sound principles.”

Of the Scotch banks, as of all others assuming the discharge of incompatible functions, and organised upon the unsound and pernicious system of making their credit issues in competition, and in the discount of commercial securities bearing interest, it may with truth be affirmed that “in periods of excitement and rising prices, they stimulate speculation unduly, and afford a spectacle of specious and factitious prosperity; while, when the recoil takes place, they sweep the solvent and comparatively prudent trader into the same net with the rash adventurer, and lead to awful and wide-spread ruin.” Hence it is that in periods of commercial difficulty, “no country is said to suffer from insolvency more severely than Scotland, whilst of Manchester, “where banks of issue have never existed until recently, and then to a small extent,” it is remarked that “it furnishes an interesting and instructive contrast.”

It is also notorious and not denied that in Scotland the use of gold is almost unknown, and that under the appearance of a nominal competition, a real combination exists against demands for specie and for the maintenance of an exclusive paper currency.

“There is no principle in the law better settled than that whatever has an obvious tendency to encourage guilty negligence, fraud or crime, is contrary to public policy.” And such, in the very nature of things, is the tendency of allowing the trader, and especially the banker, to limit, to throw off, or in any way to restrict his natural responsibility or his legal liability. From this liability there should be no escape, “not even by express promise or special acceptance any more than by notice.”

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