89 CHAP. VI. APPLICATION OF STATE FUNDS TO THE ESTABLISHMENT OF APPARENT NECESSITY ING INSTITUTIONS IN THE UNITED STATES. ADVANTAGE VI. THE case where the credit or the funds of the CHAP. states have been applied to the creation or extension of banking institutions is next to be considered. Although the primary object contemplated by the states, in promoting the welfare of such institutions, has been to afford the means of a judicious increase of the circulating medium, and thereby to give impulse and vigour to agricultural labour, activity to commercial enterprise, and an increased value to the lands of the state; yet, in a variety of cases, the state, by retaining a greater or less share in the bank, has also had in view the Applifunds to cation of establish CHAP. creation of a revenue by participating in the profits of the establishment. VI. Security which this affords. Auxiliary funds not required. In considering this application of the funds, when the sums have been obtained by loans, a material difference in the degree of security which the lender derives from the nature of the undertaking, compared with what he derives from an application of the funds to works of internal improvement, arises out of the earlier returns which banking institutions make for the capital invested. We have seen that the length of time during which railroads and canals must necessarily remain unproductive renders the pledge of auxiliary funds desirable, to prevent the accumulation of an arrear of interest while the works are in progress; but as the capital of a bank, if it is well conducted, will begin to make a return from the first, a collateral security of this nature is not required. The provisions of the charter of the bank, and the degree of prudence and integrity shown in the management of its affairs, are what the lender should rather look to in this case, as affording a security arising out of the application of the funds, apart from that which he derives from the general resources of the state. These points can only be thoroughly investigated by a reference to each separate case, and they will in this way, as far as it is practicable, be presently considered: the different degrees of connection that exist in different cases, between the bank and the state, are no less deserving of attention, and will be first taken into consideration. VI. owned solely by the state. There are several instances to be found of banks CHAP. which are the exclusive property of the states in which they are situated; and some few where the Banks capital has been altogether raised by a creation of state debt. This arrangement affords less security to the public creditor than when the state is a copartner; as in the latter case, the bonds which are issued in payment of the share which the state holds in the bank, and which constitute the state debt, are made payable to the order of the bank, and are indorsed by it, and have by this means the additional guarantee of the capital subscribed by the remaining proprietors.* This identity between the government and the bank is objectionable on other grounds; for although the act of the legislature, which incorporates the bank usually places the president and directors under restrictions as to the proportion to be observed between its issues and other liabilities, and the amount of its capital; yet, in places where wealth is likely to have a preponderating influence, those at the head of the banking establishments will *The capital of the bank of the state of Alabama, which is solely owned by the state, besides the borrowed capital arising out of the state loan, consists of certain trust funds set aside for the purposes of education, called the "University fund," and of the "three per cent. fund," arising out of three per cent. on the amount of the sales of public lands which is given to the state for internal improvements; but these funds afford no additional security to the holder of the state bonds, as the agreement which pledges the general revenue of the state for the payment of the principal and interest specially exempts these items from the pledge. VI. CHAP. probably be chosen to the legislative and executive offices of the state, in which case the control exercised by them in their latter capacity can be little depended upon in checking their own acts as directors of the bank; and should the necessities of a government become at any time urgent, it would be under a strong temptation to draw on the bank, till the bank became as necessitous as itself: much room is also left under this system for the exercise of a dangerous monopoly. Although liable to these objections in theory, it must be stated, however, that no serious charge of an indiscreet exercise of their power has been brought against the directors of banks so constituted. Banks where the state is coproprietor. Bank of The cases in which the state is co-proprietor in a bank are very numerous, and while this system, as we have seen, affords a greater degree of security to the holder of the state's engagements, the benefits which the state derives from it are very considerable. The Bank of Louisiana was one of the earliest institutions of this nature, and its charter seems to have served as a model for similar establishments in other states; for this reason, and on account of its having now been sufficiently long in operation to have presented several interesting results, some details may be entered into, as illustrative of the general proceedings of banks founded on this principle. This bank was established by an act, which was finally approved of by the legislature on the 10th of April 1824, and soon afterwards commenced business: the charter extends to 1870. The capital consisted of $4,000,000, of which one half was subscribed by the state, and paid for by an issue of bonds bearing interest at 5 per cent.; the remaining half was subscribed by individuals, and was to be paid for in specie, although the enforcement of this provision was afterwards relaxed: the credit of the state being then untried, the bonds were only received at the rate of 833 per cent of their nominal amount, so that bonds for $2,400,000 were given as the state's subscription, which were to be redeemed in equal portions at the end of ten, fifteen, twenty, and twenty-five years from the date of the act; the bonds were not to be sold by the bank otherwise than for specie, and not below the rate at which they received them: the bank was allowed to appoint the place where the half-yearly interest was to be paid; but any additional charge, loss on exchange, or other expenses which might be consequent upon the payment at any other place than New Orleans, were to be defrayed by the bank.* The faith of the state was pledged for the payment of the principal and interest of the bonds, but so long as the share of the state in the profits of the bank was more than sufficient to pay the * The state bonds were sold at a profit of 322,000; but, by an engagement to pay the interest in London at the rate of 4s. 6d. per dollar, the bank loses the premium on the current rate of exchange, between England and America which will absorb nearly one half of this profit before the bonds are all repaid. 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