Page:A History of Banking in the United States.djvu/204

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A HISTORY OF BANKING.

That the system should have tended to these heats and chills seems a necessary consequence of its character. There was no limit to the bank note issue, except the utmost which each bank could keep afloat. The Specie reserve was made as small as the banker dared to risk. This specie became the vital nerve of the entire economic system of the country. The jealousy with which it was watched over seemed sometimes ridiculous and sometimes tragic. When things seemed prosperous and the exchanges were favorable, the banker put out his circulation. When one did it, the others did it, and the consequence was a general inflation. Presently the issue became excessive. The exchanges turned and a little specie was shipped. Thereupon, the vital nerve being touched, a shock went through the entire system. Discounts were refused; loans could only be obtained through brokers at extravagant rates; the circulation was contracted very suddenly; the commercial system was arrested; then industry stopped; production was reduced; wages were lowered; and finally the farmers, so far as they were debtors, were reached. This severe remedy operated a cure, and all were ready to begin again. This course was not accomplished, of course, in its complete round every few months. The minor fluctuations touched only the first mentioned part of the industrial organization. The greater ones produced little crises. The banks, generally speaking, sowed the storm and left others to reap the whirlwind. Considering the fact that the bank circulation was very strictly localized, it is possible that the expansions and contractions may have had that prompt effect upon prices which Gouge, Raguet, and others attributed to them. Amongst the evil influences which intensified the effects of these methods, the usury law must be put amongst the very first. Nine-tenths of the evil practices of the banks were due to attempts to evade that law in obtaining rates which were legitimately theirs by the operation of the market.[1] If they had been allowed to operate on their discount rate, they would have had less motive to operate on the amount of their circulation.

  1. Raguet, Currency and Banking, 104.