A considerable amount of capital remains unemployed, and the consequence is, that the currency is unnaturally expanded. Its amount in 1830 was $7,292,000, being about 35 per cent of the banking capital, whereas, had there been no tax, a part of the deposits would have been converted into bank stock, the liabilities of the banks would have been diminished, the amount of capital seeking investment would have been greatly reduced, and steadiness would have been nearly complete. The conversion of two millions of deposits into stock would have produced the following state of things:

Here would be perfect equality and steadiness. There would be no inducement to send capital to Mississippi, or Arkansas, in search of divi dends.

It will be said that banks occasionally fail in both Massachusetts and Rhode Island. Such is the fact.

In Massachusetts, a large amount of capital belonging to the government, which was not at liberty to employ it, was placed in several banks, managed by persons whom individual merchants would not have trusted to any great extent. Intoxicated with the command of so large an amount of money, they were led to speculate largely; and when at length, after the passage of a law for that purpose, those deposits became currency, payable on demand, they were unable to reconvert their houses and lots into money, and they and the banks they controlled stopped payment. Independently of this cause, however, there were two failures of banks in Rhode Island,* and five in Massachusetts, in the quarter century from 1811 to 1836, by which the community lost probably seventy or eighty thousand dollars It is one of the advantages of free trade, that every trader in money knows that he must stand or fall by his own acts, and that if he overtrades and gets into trouble, there will be none to help him. In the middle states, where banks overtrade largely, they feel that all must stand or fall together, and therefore sound institutions are sometimes obliged to burden themselves with the support of unsound ones; but in Massachusetts there is a degree of independence that forbids the necessity of so doing, any more than there would exist on the part of the solvent shoemakers, or tailors, to

The bank commissioners, in 1837, remarked with great truth, that the banks of the state had always "sustained an enviable character, as compared with those of many others of the United States."

pay the debts of one of their neighbors of the trade, lest all shoemakers or tailors should lose their credit. The more perfect the freedom of trade, the smaller must be the liabilities of banks, the less must be the danger of change in the amount and value of the currency, the smaller must be the risks of banks in their dealings with individuals, and the smaller must be the risks of the community in trading with banks.

IN THE OTHER NEW ENGLAND STATES, freedom of trade is less perfect than in the two to which we have now referred. Capital accumulates while waiting to find the means of investment, and the currency is unnaturally expanded. Banks trade upon the capital of others, and when the time arrives for repayment, it sometimes happens that they are unable to redeem their obligations. Here we have more restriction and less steadiness: more currency and less equality of profit.

In the MIDDLE and SOUTHERN STATES, there is still less freedom of trade. Persons possessing capital which they would gladly lend out, are prevented from opening shops for that purpose, because of the difficulties attendant upon obtaining permission to trade in the manner that is usual with bankers. No man will do business with a bank that will not afford him the usual facilities of trade, by receiving and guarding his funds, and by transferring the same by means of checks and notes. No man will undertake to afford these facilities, if his whole property be liable for the return of such moneys, unless largely paid for such risk. He can obtain such compensation only by means of largely overtrading, to accomplish which he must maintain a large circulation and have large deposits. Trade is already too free to permit the accumulation of unemployed capital to the extent required to give him such profits, and he is therefore compelled to let his capital remain in bank for the benefit of the stockholders of those institutions who have obtained permission, in the form of acts of incorporation, to trade with their customers on the footing of limited liability. The consequence is, that these latter are enabled to divide 7, 8, 9, or 10 per cent, while large amounts of capital lie idle, yielding no return to the owners, who would gladly take 6 per cent at home, but in default thereof are compelled to send it to Kentucky or Mississippi. The currency is large, liable to sudden and rapid increase, to the injury of the capitalist, who is, by restrictions, deprived of the means of protection.

At one time the banks increase their loans largely, and the necessary consequence is a great increase of deposits. This prompts to a further increase of loans, which leads to a further increase of deposits, consisting of capital the owners of which find a daily increasing difficulty in obtaining interest.

Commencing with the following state of things,
No. 1. Capital,

$20,000,000 Loans, $30,000,000

The banks have invested 44 millions, while the owners of those millions have been seeking the means of using them. Both have been in the market, forcing up prices. The ball thus set in motion rolls on: stocks rise rapidly, and the unfortunate capitalist finds that he cannot obtain more than 5 per cent, while the owners of bank stock are likely to have 7 or 8. The latter have made money "too cheap" for their own benefit, at his expense, and at that of all those who, like him, have to find modes of investing their capital.

Every day increases the currency. Every day increases prices. Stocks rise; then houses, lots, and lands. Railroads and canals follow in succession.

The owner of property ceases to regard the amount of interest to be yielded by it, regarding only the increase that must take place in its price. Farms are converted into town lots, houses are built, new railroads and canals are subscribed for, and the people of Vicksburg, New Orleans, and Cincinnati, send their agents to obtain a share of the vast surplus. The capitalists having thus, at length, found the means of employing their unproductive capital, claim a repayment of the deposits, and now the banks are compelled to demand payment of their debtors. These unfortunates, having half finished their roads, canals, ships, and houses, are compelled to bring them into market in their unfinished state; and now it is discovered that the same capital has been employed in performing two operations; that A, B, C, the temporary employers, and D, E, F, the actual owners, have both been building houses, or making roads and canals, for the purpose of investing the same capital at the same time, and that when half finished, one or other must suspend operations, and perhaps sacrifice what he has done, with a view to enable the other to complete his work. A, B, and C are ruined, and D, E, and F find that the supply of houses or stocks is greater than the demand, and that, after having been kept for months without interest, they must now lose 10, 15, or 20 per cent in the diminished value of the property purchased.

All this would have been prevented in the outset, had the capitalist had it in his power, when the expansion began, to claim of the banker a certificate of stock in lieu of his deposits, or failing that, to unite with his neighbor in opening a shop to lend out their own money for their own profit. The conversion of his deposit into stock would at once have diminished the amount of capital seeking investment, and the tendency to a rise of price would have been checked. Instead of the state of things above, marked No. 2, we might have had, at the same date,

In comparing the systems of the north and south, nothing is more striking than the difference in the tendency to accumulate masses of capital under the control of individuals. In Rhode Island, there is a bank for every two thousand inhabitants. Almost every village has its money shop, and their capitals vary from 20,000 to 500,000 dollars. In Massachusetts, there

* We shall have occasion to show, in a future number, that perfect freedom, the right to make banks at will, would probably be attended by a diminution in the amount of capital so employed, and an increase in the amount directly employed by the owners

are now one hundred and thirty-eight banks, but the largest is only $1,800,000, and only six are equal to $1,000,000. In Mississippi and Louisiana, on the contrary, we find banks with capitals of five and twelve millions.

Up to the year 1826, the BANK OF ENGLAND enjoyed a monopoly of the right of trading in money, on the footing of a joint-stock association. Private banks existed throughout the country, but they were limited in the number of their partners. Failures among them were so numerous* that the owners of capital became unwilling to place it with them; and the consequence was, that the bank enjoyed the advantage of an immense circulation and large deposits. Her capital was lent to the government at 3 per cent, and the interest thereof did little more than cover the expenses of management. Her dividends were derived from the currency that could be maintained, and they increased with every increase in the quantity of capital, unproductive to the owners, that could be brought into her hands. In August, 1822, the total amount of circulation and deposits, or currency, was

In 1826, they had risen to

At the first date the loans on interest amounted to
At the second, they were

£23,863,000 32,402,000

£17,290,000

32,918,000

The unfortunate small capitalist had no remedy. He could not demand of the bank shares of stock, nor could he create them for himself. He could not become a member of banking-house, nor could he induce such houses to pay him the common rate of interest. He could only, with great risk to himself, obtain 2 per cent, until some joint-stock company in Mexico, or Peru, or Chili, or some foreign loan, likely never to be repaid, afforded him a prospect of obtaining abroad that remuneration for the use of his capital that was denied him at home, while bankers and owners of bank stock were receiving 8 per cent, or more, derived from the use of his capital, and that of others similarly circumstanced. Here was an excess of currency, attended with infinite danger, because of the extreme inequality of profit which was forcing abroad that capital for which there was abundant demand at home. The crisis came, and the disadvantage of the system became obvious. Some of the restraints upon association were repealed, and the owners of capital are now permitted to form jointstock companies, provided they are willing, when their customers ask them to grant the usual facilities of trade, by receiving their funds on deposit, and transferring the same by means of checks or notes, to be responsible in the whole of their individual properties for the repayment thereof. Men of common prudence refuse to come under such responsibilities,† and the consequence is, that large amounts of capital remain unemployed, constituting currency, or on deposit at low interest, liable, at short notice, to

* In 1814, 1815, and 1816, no less than two hundred and forty private bankers became bankrupt. In 1821 to 1830, the number of bankruptcies was one hundred and twenty-five. Mr. M'Culloch says, (Dictionary of Commerce, p. 85,) that "the numerous failures that have taken place among them have, by generating a feeling of inse curity in the minds of their depositors, confined this branch of business within comparatively narrow limits."

+ Mr. M'Culloch says, (Dictionary of Commerce, article Banks,) that "it may well excite astonishment that any one who can really afford to make a bona fide purchase of shares in a bank, should be foolhardy enough to embark in such concerns."

become so.

Those who incur the hazard have large profits, derived from the excess of currency thus produced, while the prudent and careful have small ones. The dividends of joint-stock banks have averaged about 8 per cent, being double the rate at which their capitals are lent out. It follows that their loans are much more than double the amount of capital.

The amount loaned out by banks is probably not less than eighty mil. lions, yielding interest amounting to £3,200,000, to be divided among the owners of thirty millions of capital. The owners of thirty or forty millions of deposits are compelled to forego all interest, or to take 2 or 2} per cent, when, if they were permitted to open money shops for themselves, and to trade with their neighbors on such terms as they might mutually judge advantageous, they could have 4 per cent, and their capital would cease to exist in the form of currency liable to change with every wind that blows, and giving to a few individuals the power of raising or depressing prices at pleasure. The following will show the condition now exist. ing, and that which would exist, were all restrictions abolished.

No. 1 gives unsteadiness, insecurity, and inequality of profit, producing vast waste of capital, whereas the other gives steadiness, security, and equality of profit, attended by a profitable application of capital.

Had England had a system like that of Rhode Island, she would have escaped the troubles of 1825, 1836, and 1839. Her capitalists would have obtained moderate profits at home, and would have had no inducement in the first period to engage in the gambling operations of Mexico and South America; nor would they, in the two latter, have found it necessary to administer to the spirit of speculation in the United States, by contributing their means for the erection of railroads and canals through all the states of the west. The law of 1826 was an improvement, and we may hope that the time is not far distant when trade will be set free from all restrictions.

It is usual to attribute the present derangement of the English money market to the necessity for importing corn, but it is really due to restrictions upon the employment of capital, the most important of which are those relating to the trade in money. All of them tend to cause unemployed capital to accumulate, and the corn laws thus tend to increase the danger of injury from the immense mass of currency always existing in England. Under a system of perfect freedom no deficiency of crops could cause a demand upon the banks that would make it necessary for them to change their operations 2 per cent, because there would be no unemployed capital in their hands. The small amount of circulation and deposits, or currency, that would exist, must be maintained nearly at the same point under any circumstances. Under such a system, the deficiency of grain would produce no more effect upon the operations of the dealers in money, than upon those of the dealers in shoes or hats. It would be attended by a rise of the price of that commodity, and a diminution in that of all other commodities, without the slightest interference of the banks. The induce. ments to import corn would constantly increase, while there would be dimin