Page:A History of Banking in the United States.djvu/195

 many of its features, a dark and disgraceful picture." Contraction is a policy by which banks save themselves and ruin the community after leading it into error. The great fault of the banks is that they are not founded on real capital. He proposed a system of free banking, the capital to be invested in stocks, etc.; the fundamental idea of the free banking law of 1838. In "A Peep into the Banks," the anonymous author criticized adversely a project which was then proposed for a Bank of the State. "The time was," he says, "when to get a bank, it was thought necessary to have money to put in it; now men get a bank charter for the contrary reason,—because they have no money and want some. Fools and knaves in their individual transactions obtain little or no credit, but when congregated by a legislative act, have too frequently been invested in the eyes of humble but honest and industrious mechanics with a dignity and importance that have been alike ruinous to the possessor and beholder."

By an act of April 2, 1829, in accordance with a recommendation of Governor Van Buren, the safety fund system of banking was established in New York. There were forty banks whose charters were about to expire. In a work on "Banks and Banking in the State of New York" by A. C. Flagg, the system is said to have been imitated from a combination of the Hong merchants in China for mutual support. Hammond says that it was invented by Joshua Foreman. The notes were not to exceed twice the capital paid in, and loans were not to exceed two and a-half times the capital. Each bank was to put in the hands of the Treasurer of the State annually one-half of one per cent. of its capital stock until it had paid three per cent. of its capital. The fund thus constituted was to be used to pay the circulation and other debts of any one of the included banks if it should become insolvent, and if the fund was thus diminished, it was to be restored by pro rata payments as before. After the three per cent. fund was constituted, the accumulations were distributed amongst the contributing banks, unless the insolvency of some of them drew the fund down below its normal amount. The banks were thus to be compelled to watch each other.

Experience quickly developed two great faults in this system; the responsibility of the safety fund for all the debts of the bank, and the rating of the contribution to the fund on the capital and not on the circulation. Isaac Bronson touched the weak point of it, saying: "But it is not perceived how the Commissioners of the safety fund are to have any influence in preventing all the banks in the State from suspending payment at once." All the banks, he thought, would continue to issue paper, as in the past, if the exchanges should continue favorable, and if there were no restraints by a national bank. This was exactly what happened. Gallatin, in his Essay of 1841, made the following criticism: "The annual tax of onehalf per cent., imposed under the name of 'a safety fund,' is unjust towards the banks which are well administered, and injurious to the community at