Albert Gallatin letter to Jonathan Goodhue, 5 April 1838

New York, April 5, 1838.

Dear Sir, - You asked for some details respecting the issue of State stock, applied for the purpose of aiding the banks in maintaining specie payments. I had thought it sufficient to state the object and leave all details to the Legislature. The object is twofold : 1, to afford to the banks additional means of raising money at once by the sale or on the pledge of the stock ; 2, to produce on other communities and other States a moral effect by inspiring the confidence which the support of the State will give. In reference to the last point it may be proper to make the amount larger than would be otherwise necessary or could be used. I think that it should not be less than five nor more than ten millions of dollars.

The operation will be onerous to the banks ; they must, in order to realize, sell the stock cheap, and, if through the means of foreign exchange, draw on very unfavorable terms. There is no danger of any that is sound taking more than the amount absolutely necessary. The stock must, either by its rate of interest, or rather by the number of years for which it shall be made irredeemable, be made worth more than par, reserving to the State, if thought proper, the premium above par at which it may be sold. A five per cent, stock redeemable after 1860 will answer.

The convenience of the State must determine the time and mode of payment of the stock by the banks. If the State intends to issue stock for the purpose of raising funds for internal improvements, and that should be the stock sold to the banks, it must be paid for in instalments at the time and times when wanted for such improvements. In my opinion it would be more advantageous for the banks to pay for the stock within a short period, say in three or four annual instalments. But if the State issues the stock solely for the purpose of aiding the banks and without reference to an application hereafter of its proceeds to public objects, it may be expected that, however inconvenient to the banks, they must pay the interest for the whole period and reimburse the principal. In that case the State only interposes its credit ; the premium, if any, must belong to the banks; and there would seem to be an impropriety in making the stock irredeemable for a longer time than the period of the existence of the bank, which should thus engage to reimburse the principal. The charter of the National Bank expires 31st December, 1856; those of the principal city banks, I believe, in 1852-1853.

If deemed necessary to specify the contingency on which the stock should be issued, I say, without hesitation, that it is wanted only in case the banks of Philadelphia, or, to speak with more precision, the United States Bank of Pennsylvania, should not resume simultaneously with or shortly after those of New York. The Legislature may, as it shall deem best, specify the contingency, or leave it discretionary with the officers charged with the execution of the law.

As to the execution of the law, the object for which the stock is permitted to be issued must of course be defined. It is intended to be sold on credit (as above stated) to the banks of the city of New York for the purpose of aiding them to maintain specie payments. All further details should, I think, be left to the discretion of the State officers. No other security can be expected than the sound situation and general character of the banks to which the stock may be sold ; but it should not be thus sold to any that is not sound and of good standing. Hence the necessity of a discretion in the public officers.

The conditions also must in part depend on circumstances, and cannot be well defined beforehand. The essential condition will always be, in substance, that the stock shall be exclusively applied to the object for which it is sold to the banks. That generally will be the sale or pledge of it for specie ; but there may be other modes equally efficient to apply it, and on the whole it will, I think, be best to leave the conditions to the Executive discretion. When speaking of the soundness of a bank, I must say that, though wounded, it may be perfectly sound so far as relates to its creditors. Thus, though the Mechanics' Bank should lose two or three hundred thousand dollars of its capital, it would with the remaining seventeen or eighteen hundred thousand be as perfectly safe as if its capital had originally amounted to that sum. I mention this because I wish government to lend it three or four hundred thousand dollars, without which it may be difficult for it to resume specie payments with safety to the whole banking concern. If you should have an occasion, mention this to the Governor.

I wish also that the fatal effect of a repeal of the charter of the Phoenix Bank taking effect immediately, on its discounters and depositors, and on the general banking and commercial interest of the city, may be taken seriously into consideration.

What is meant by the report of the bank committee to the Senate to permit banks to receive deposits payable in current bills ? This presupposes current bills not payable in specie, or, in other words, a protraction of the suspension of specie payments.

With great respect, &c.