From Oliver Wolcott, Junior
[Philadelphia, September, 1791]
Observations on the question, whether it is expedient for the Bank of the United States to operate by Departments?
It is first necessary to determine, whether any limitations in the constitution of the Bank of the United States, render it improper for the Corporation to operate by departments. A fair construction of the law1 must decide this point.
The only limitation in the act of incorporation which can affect this inquiry, is contained in the ninth section of the Law,2 and is expressed in these words. “The total amount of the debts which the said corporation shall at any time owe, whether by bond bill note or other contract, shall not exceed the sum of ten millions of dollars over and above the monies then actually deposited in the bank for safe keeping, unless the contracting of a greater debt shall have been previously authorised by a Law of the United States.”
It is presumed to be the effect of this provision, that the debts of the bank ought to be so limited that the debts due for deposits may at all times be for such amounts only as can be satisfied, out of the deposits, and the debts contracted on account of the capital Stock, such as the capital Stock will satisfy. There is no limitation with respect to the debts which may be due for deposits, which may rise to any amount that individuals, may intrust to the Bank. The profits of the Bank can in no sence be said to result immediately from debts due from the Bank. The profits will always result from operations which will occasion debts to be due to the Bank, and in this respect the bank of the United States is not limited by Law. From this view of the subject, it is evident, that nothing in the Law, forbids the bank of the United States to lend the whole of the Specie part of its capital and the whole of the deposits—though it is not contended that it will be consistent with the exercise of a good discretion to lend or discount to this extent.
The Bank being therefore at liberty to lend or discount to an indefinite amount taking care that the debts due by the bank, in no instance exceed its credits; it follows, that no restriction in the Law, forbids the establishment of departments.
The next enquiry is, can the right of establishing departments be excercised, so as to render it expedient?
To solve this question it is necessary to consider how banks operate & from what sources their profits result.
It is presumed that the capital Stock of a bank, is principally intended to serve as a pledge to its customers, that any losses which it may suffer, shall not impair its ability to satisfy the demands of those who may deposit money in its coffers. A bank may indeed trade on its capital Stock, but it is not for this purpose that banks are incorporated. If the capital Stock of a bank is considered seperately from the deposits, the former, instead of being rendered more profitable is rendered of less value, by being employed in a Bank of discount & Deposit by the tendency which such banks ever have to reduce the rate of interest and by the increased expences of management which attend such institutions. If such a bank receives deposits without being permitted to lend them the capital is charged with the risque of safekeeping which is an additional expence. Hence it follows that the capital of a bank need not and ought not in most cases to exceed what is necessary to insure against all contingencies—and hence the importance of wisdom, prudence and integrity in the administrators, which being the chief causes of credit, by diminishing the chances of loss, render the less capital necessary.
In every community there is a sum reserved in the hands of individuals which is to them an unproductive or dead Stock. The amount of this Stock is continually varying with every change in society, and can only be calculated by observation. As this stock can never be profitably employed by the proprietors, it will be deposited in a bank, if sufficient assurance is given, that it will be refunded on demand. The inducement for making these deposits will in the first instance be, to avoid the risque of safe keeping. After the effect of a bank for discounts and deposits is perceived, such deposits will be continued from motives of private advantage, for by the aids received, every man in business, will find, that he can trade on the whole amount of his capital, by paying interest to the bank, on that part thereof, which would otherwise be unproductive.
The administrators of such a bank, will soon find, a sum of money continually remaining in their Coffers, which though demandable at a moment, will never be called for, while the bank retains its credit, and which they may safely lend on Interest. From lending this money, the chief profits of the bank will arise.
From these data the inference results, that an institution which should be able to produce satisfactory security of its ability to indemnify its customers from all losses & also to make payments on demand and also deservedly possess the confidence of the community, in respect to wisdom, prudence, & integrity, might excercise the business of banking with the fullest success, without employing one dollar of money as a capital. It is presumed that a capital of ten millions of Dollars is sufficient to ensure against all losses in any prudent negociations which may be made, in the United States and the sagacity of the individuals who are interested in the capital Stock, may be safely trusted to call into their service the most able and upright administrators.
It is also presumed that the plan for establishing departments, which is herewith submitted, is attended with no risque, which would not attend the operations of a single bank, which should operate to the extent of the principal bank & the departments.
If the plan now proposed is observed, the debts can never exceed the resources of the bank; compleat information will be attainable by the Directors of the Bank of the United States, of all the business done by the Departments & the operations of the Bank may be extended wherever the deposits will amou[n]t to such a sum, that the interest of that part which may be loaned out, will defray the expences of a proper establishment. The profits resulting from an extensive operation upon this plan, appear to be sufficiently alluring to the corporation of the Bank of the United States and the advantages which will result to the community from banks well conducted, render it important, that the benefits should be extended to as wide a scene as possible.
Respectfully submitted by
ADfS, Connecticut Historical Society, Hartford.
1. “An Act to incorporate the subscribers to the Bank of the United States” (1 Stat. description begins The Public Statutes at Large of the United States of America (Boston, 1845). description ends 193–95 [February 25, 1791]).
2. Section 7 of the act enumerates the “rules, restrictions, limitations and provisions” to be incorporated into the constitution of the Bank of the United States. Wolcott’s reference is to number IX of these provisions.