BANKING POLICY
[77
practice of some banks to confine their discounts exclusively to business
paper, or paper that is subject to no renewal, is a great innovation, and
denies to a worthy class of borrowers those facilities and advantages to which
they are entitled in common with those of more various and extended business.
It cannot be doubted that there is a class of borrowers of limited business
whose requests for bank favors are small and infrequent, and for whom
some accommodation, by way of renewal, is proper.!
The Massachusetts commissioners in 1839 also cautioned the
banks against excessive refusal of accommodation loans.
A few writers advanced a very significant criticism of the doctrine
that bank credit could have no harmful effect if issued only
in response to the demands of commerce as evidenced by the offer
of real paper for discount. Raguet, in a remarkable analysis of
the causes of commercial crises, pointed out that a liberal loan
policy, leading to rising prices, stimulates trade activity. A
sellers’ market results, and “purchases are made for no other
reason, than that the buyers suppose they can sell the next day
at a profit.” Transfers of goods for speculative purpose become
numerous. ‘Every new sale of commodities and property on
credit creates new promissory notes, and these create a new demand
for discounts.” And so the cycle goes cumulatively on,
until bank reserves become too slight and the inevitable check
upon expanding credit brings disaster.?
C. F. Adams gave essentially the same explanation in discussing
the crisis of 1837. Expanding note issues enhance prices and,
therefore, profits rise. Business activity increases, and the rising
prices, taken together with more frequent transfers of the same
article, occasion a larger volume of real paper, the discount of
which renews the process.* And Gouge, who later modified his
original hostility toward banks and practically accepted the doctrine
that no evil would result if discounting were but confined to
real paper, retained sufficient of his earlier bias to protest that he
would still prefer to dispense with credit banks altogether. Just
as trade could not be disturbed if carried on by barter of commod-'
Connecticut, Report of Bank Commissioners (1841), in U. S. House of Representatives,
29th Congress, 1st Session, Document 226, p. 210.
* Raguet, “Principles of Banking,” Free Trade Advocate (1829), ii, 7. Raguet
gave a similar account in Currency and Banking (18309), pp. 134-137.
8 C. F. Adams, Reflections, etc. (1837), pp. 9-12.
