I
THE STATE AND f ATKMAL BANKS.
THE QUESTION
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TAXATION,
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IMPORTANT CORRESPONDENCE BETWEEN BANK
OFFICERS AND THE COMPTROLLER.
ALBANY:
WEED," PARSONS AND COMPANY, PRINTERS
1864.
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THE STATE AND NATIONAL BANKS,
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THE QUESTION
OF
TAXATION,
IMPORTANT CORRESPONDENCE BETWEEN BANK
OFFICERS AND THE COMPTROLLER.
ALBANY:
WEED, PARSONS AND COMPANY, PRINTERS,
1864.
& c.
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LETTER OF BANKERS TO THE COMPTROLLER.
Albany, April 8, 1864.
To the Hon. Lucius Robinson,
Comptroller of the State of New York :
Dear Sir — By the act of Congress of February 25,
1862, all banks receiving deposits of money, subject to
payment in checks or drafts, except Saving Banks, shall
be subject to a duty of one-quarter of one per cent a year,
on the average amount of such deposits, beyond the
average amount of their circulation. The Commissioner
of Revenue was asked, if, under said act, the deposits
made by banks with each other, could be so taxed as to
repeat the tax two or three times over. For instance, if a
bank in this city had on deposit two millions of dollars, all
of which was deposited by it, in a bank in the city of New
York — should the bank here be taxed on the two millions,
and the bank in New York, with whom it was deposited,
also be taxed on the same ?
He was asked if a Savings Bank, especially excepted
from the operations of the act, could have its money taxed,
which was deposited in a bank of discount and of deposit,
thus indirectly doing what could not be done directly ?
He was also asked, if money deposited by the state was
liable to taxation? To all these questions he replied
affirmatively. 671.037
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4
But on a more deliberate consideration of the subject, as
presented to him by a committee of gentlemen from the
New York Clearing House, he reversed his decision as to
balances due to banks, leaving in abeyance the claim to a
tax on state deposits. Congress having failed to carry out
the secretary's recommendation, to further tax state insti¬
tutions, to the exclusion of National Banks, he has reversed
his reversal, and we have been notified by the Commis¬
sioner, within a few days, that he has re-assumed his
abandoned ground, and that banks must pay a tax on all
their deposits, from Saving Banks and from each other
even though the same deposit should run through half a
dozen banks, and thus be as many times taxed. The
Commissioner revives his suspended demand of a tax on
money deposited with us by the state.
Without indicating how we shall feel constrained to act
in the matter concerning ourselves alone, it will scarcely be
expected of us, either to defend the rights or to assume
the liabilities of the state. We therefore submit this
branch of the question for your instructions to us, and for
your adjustment with the Treasury Department. We
know what the banks and the state have done, and are
disposed and determined to do, to put down the rebellion.
And whilst Ave ask not for a gratuity of one million four
hundred thousand dollars which has been allowed to a
favorite, yet Ave do claim for the banks in our three princi¬
pal cities, at least a slight appreciation of the Arastly more
important and valuable services which they have rendered
to our country. The millions which these banks loaned to
the government Avere required to be paid in gold, by the
secretary, and thus they were driven to a premature sxis-
pension, by the very hand which they strengthened to strike
the blow. They are now discarded, denounced and doomed
to destruction, and for no other cause than for their patriot¬
ism, their strength and their independence — and for the
purpose of concentrating at Washington the corporate
moneyed power of the nation, for the personal and parti-
5
san designs and the unhallowed aspirations of a single
individual.
These national banks live and move and have their being
on treasury pap. Their plates and paper and printing are
given to them. Money which the government is borrowing
at high rates of interest is deposited with these banks with¬
out interest. They are also exempt from taxation, which
is equal to 2} or 3 per cent more.
But all these advantages and largesses heaped upon them
by the Secretary, are scarcely one-third in comparison with
the field of circulation which the government has surren¬
dered to them.
They can circulate three hundred millions upon govern¬
ment 6 per cent stock, payable in gold, which is more than
10 per cent or thirty millions a year clear profit, and for
which the people are to be yearly taxed. This vast amount
could be saved by the issue of government legal tenders—
a better currency—and the people relieved from a tax Qf
thirty millions a year, given to foster and build up the most
stupendous, ill-devised and alarming system of banking
which the world has ever known. Already the condition
of the currency and of our National Treasury admonish us
of appalling dangers—dangers in view of which it were
wise to pause and prudent to reflect.
Iteferring again to the principal object of this communi¬
cation, allow us to expect your instructions whether we shall
or shall not pay the tax demanded of us by the Treasury
Department at Washington on the state deposits in our re¬
spective institutions.
We have the honor to be, dear sir, with the highest con¬
sideration, your obedient servant,
TIIOMAS W. OLCOTT,
President Mt chanics' and Farmers' Bank.
II. II. MARTIN,
Cashier of the Albany City Bank.
RUFUS II. KING,
President of New York State Bank.
E. WICKES,
Cashier Commercial Bank.
THE REPLY OE TIIE COMPTROLLER.
STATE OF NEW YORK, 4
Comptrollers Office, /
Albany, April 9th, 1864. ;
To Messrs. Thomas W. Olcott, President Mechanics' and Farmers'
Bank ; Rufus II. King, President New York State Bank ;
H. II. Martin, Cashier Albany City Bank; E. Wickes, Cashier
Commercial Bank :
Gentlemen—I liave the honor to acknowledge the
receipt of your communication of the 8th inst., requesting
instructions whether you shall or shall not pay the tax
demanded by the treasury department at Washington on
the state deposits in your respective institutions. You refer
also to some other points of difference in relation to the tax,
which do not come within the range of my official duties,
and in regard to which I need say nothing except to express
my deep regret that measures should have been adopted,
unnecessarily, as I think, which could not fail to excite
great dissatisfaction on the part of the state banks, especi¬
ally after their uniform liberality towards the government.
The commissioner of internal revenue having decided
that the tax must be levied upon state deposits the same
as upon those of individuals, I addressed to him a letter
under date of 9th November, 1863, showing that by the
laws of this state, its funds in the banks are regarded as
being in the treasury ; that the banks are to that extent a
7
part of the treasury, and the agents of the state in carrying
on its financial operations, and that to tax such funds was
to tax the state treasury. The power to do this could not
be admitted, without also admitting the right of the general
government at its pleasure, to wholly annihilate the state
government, for the power to tax necessarily involves the
power to destroy. Without going over the argument again
in this place, I take the liberty of annexing hereto for your
use, a copy of my letter to the commissioner. The position
there taken cannot be abandoned, except in obedience to a
judicial decision from the court of last resort. If the banks
choose to pay the tax, they can do so ; but it must be from
their own funds and without any expectation of being reim¬
bursed by the state. If by declining to pay, they should
be involved in litigation, the state will undoubtedly, in
accordance with its uniform practice, defend them as its
agents at its own expense.
It is very much to be regretted, that a question like this
should be forced upon the state, in the present condition of
affairs. If it must be so, however, it can never be said that
the state has been governed by unworthy motives. It seeks
only to maintain a principle which is vital to its existence.
That no mere pecuniary consideration influenced its action,
is sufficiently shown by the fact, that in addition to sending
some three hundred thousand men to the field, it has paid
from its treasury, without a murmur, over $14,000,000 on
account of the war.
It will continue to send its men and to pay its money
with a liberal hand and a patriotic spirit ; but it cannot
surrender a principle, upon which its life depends.
I am, gentlemen, with great respect, your obedient
servant,
LUCIUS ROBINSON,
Comptroller.
THE REPLY OF THE COMPTROLLER.
STATE Oí1 NEW YORK, 4
Comptroller's Office, /
Albany, April 9th, 1864. )
To Messrs. Thomas W. Olcott, President Mechanics' and Farmers'
Bank; Rufus II. King, President New York State Bank;
II. II. Martin, Cashier Albany City Bank; E. Wickes, Cashier
Commercial Bank :
Gentlemen—I have the honor to acknowledge the
receipt of your communication of the 8th inst., requesting
instructions whether you shall or shall not pay the tax
demanded by the treasury department at Washington on
the state deposits in your respective institutions. You refer
also to some other points of difference in relation to the tax,
which do not come within the range of my official duties,
and in regard to which I need say nothing except to express
my deep regret that measures should have been adopted,
unnecessarily, as I think, which could not fail to excite
great dissatisfaction on the part of the state banks, especi¬
ally after their uniform liberality towards the government.
The commissioner of internal revenue having decided
that the tax must be levied upon state deposits the same
as upon those of individuals, I addressed to him a letter
under date of 9th November, 1863, showing that by the
laws of tins state, its funds in the banks are regarded as
being in the treasury ; that the banks are to that extent a
9
are that the funds of the state when deposited cease to be
its own property and become the absolute property of the
banks—that the only position which the state occupies is
that of an ordinary creditor, like any individual depositor,
and that the relation of principal and agent does not exist.
If these assumptions are true, it follows inevitably (as all
the moneys of the state are required by law to be paid
into the banks) that the state in effect has no treasury and
no money in it, and never has had ; and that its financial
officers, among whom have been Marcy and Wright, and
Flagg and Fillmore, never knew what they were doing. It
also follows that the solemn pledges of the Constitution and
laws of this state, in regard to the large amount of trust
funds held by it, have been flagrantly violated every day
since they were made — these funds having become the
" absolute property of the banks," instead of beiug held in
trust by them. Furthermore, if the relations between the
state and the banks are such as the opinion assumes, they
are directly contrary to what both parties have always
intended and understood them to be. Every branch of the
state government — executive, legislative and judicial —
every officer connected with it, and every bank employed
by it, have always understood that such banks were mere
fiscal agents employed by the state government to aid it in
the execution of its poivers as a government, and that they
held the funds of the state in trust for that purpose and for
no other. Our numerous statutes, the stringent contracts
and penal bonds taken from the banks in pursuance of
them, have all been intended and understood to effect this
one object. They have uniformly treated the deposit
banks as the treasury. All the revenues of the state of
every description are authorized to be paid directly into the
banks as into the treasury. Not a dollar of the canal
revenues is ever paid into the treasury office. Section 8 of
chapter 162, Laws of 1848, is as follows: "Dues to the
state, which have heretofore been paid to the Commis¬
sioners of the Canal Fund, shall, on and after the first day
2
10
of October next, bo paid into the state treasury." By the
words " state treasury " in this section, the legislature and
every member of it understood, meant and intended the
deposit banks, and that intention has always been carried
out in practice. And here the question of fact might be
rested, for it is an indisputable principle, that the relations
between contracting parties, are what they themselves
intended to make them and understood them to be.
But a little attention to the practical workings of our
financial system, will show that these banks, chosen and
designated by the state officers, clearly act as agents. The
great number of banks, designated as canal toll banks,
simply receive the tolls and forward them to the deposit
banks in Albany. They have the right to forward them
whenever they please, and many of them do this without
waiting to be called upon. All must do it when called
upon, as provided in their contracts. They never pay out
a dollar of the money upon checks. They have nothing to
do with it but to receive it from the collectors and forward
it to its destination. They are, therefore, mere receiving
and forwarding agents, and no reasonable construction can
make them anything else. The fact that they pay interest
for the use of the money while passing through their
hands, can make no difference, so long as they are held
under stringent laws and bonds to forward the amount of
it when required.
The deposit banks at Albany, both for general fund and
canal fund moneys, pay out upon checks so much as is
required for current expenses. But the very large amounts
required for the payment of interest and principal of the
state debt, are forwarded by the Albany banks, upon trans¬
fer drafts, to the Manhattan Company in the city of New
York. That company then pays to all the numerous hold¬
ers of the state stocks the amounts due to them respectively.
It does this without a single check being drawn in favor of
any one of them. With the money placed in its hands by
the state for that purpose, it pays the debts of the state,
11
takes the proper receipts for the same from the various
persons to whom it pays, and returns them to the comptrol¬
ler and auditor. If this is not in every respect an agency,
pure and simple, I must confess that after thirty years'
practice in the legal profession, I have failed to learn what
facts will constitute that relation. If it were true that the
state had no character, and no powers except those of a pri¬
vate citizen, as the opinion seems to assume, these facts
would make it a principle and the banks its agents. I re¬
spectfully submit, therefore, that it is not " a flagrant mis¬
nomer" so to speak of them.
But the state is not a private citizen nor a corporation ;
7t is a government ; as much so, and in many respects more
so and with more unlimited powers than the government of
the United States; and as such it uses certain of its own
banks, created by it and the creatures of its power, as in¬
struments to aid it in executing its duties as a government. It
is fully and clearly settled what are its legal rights and re¬
lations in that respect by one of the most elaborately argued
and carefully considered cases ever decided in this countiy.
I refer, of course, to the well known case of McCulloch v.
The State of Maryland, 4th Wheaton, 316. One of the
questions in that case was as to the right of the state to tax
a branch of the United States bank. Mr. Webster in argu¬
ing against the right, stated one of his positions thus: "A
bank is a proper and suitable instrument to assist the ope¬
rations of the government in the collection and disburse¬
ment of the revenue." And Chief Justice Makshaxl, in
delivering the unanimous opinion of the court, enumerates
among the powers of government " the power of conveying
money from place to place as the exigencies of the nation may
require, and of employing the usual means of conveyance."
He further says: "If a corporation may be employed indis¬
criminately with other means to carry into execution the
powers of the government, no particular reason can be
assigned for excluding the use of a bank if required for its
fiscal operations." * * * "That it is a convenient,
12
a useful and essential instrument in the prosecution of its
fiscal operations is not now a subject of controversy."
» # # "The time has passed away when it can be
necessary to enter into any discussion in order to prove the
importance of this instrument, as a means to effect the
legitimate objects of the government." The concluding
passage of his opinion is in these words: "But this is a tax
on the operations of the bank, and is consequently a tax on
the operations of an instrument employed by the government
of the Union to carry its powers into execution. Such a tax
must be unconstitutional."
So the banks employed by the State of New York are
" convenient, useful, and essential instruments in the
prosecution of its fiscal operations." Its funds received,
disbursed and conveyed from place to place by these, its
instruments and agents, cannot be taxed. There can be
no principle which authorizes the United States to tax the
fiscal agents of the state, under circumstances which would
forbid the state to tax those of the Union.
In 1836, the United States by act of congress, selected
deposit banks in all the states in which the funds of the
government were deposited and from which. they were
disbursed. The act was in many respects so similar to the
provision of the New York statutes, that it was evidently
modeled after them. Provision was made, among other
things, for the payment of interest to the government when
the deposits exceeded a certain amount. Did, then, these
funds of the United States become the absolute property
of the banks, and consequently liable to taxation by the
states ? Were they mere " loans " because interest was
paid ? The case cited answers these questions. The funds
were in the hands of the state banks, as " instruments of
the government," and could not be taxed by the states.
So the funds of this state are in the hands of its instru¬
ments and fiscal agents, having far more of the character¬
istics of agency than the United States Bank or the
13
Deposit Banks of 1836 ever had. On no conceivable
principle can they be taxed.
The direct tax law, sec. 50, provides for*the selection of
depositories of the revenue collected in the different states,
to act as receiving and disbursing agents as our banks do ;
and the internal revenue law under which you act, sec. 23,
provides also for similar depositories to receive the moneys
collected, give receipts for them, and transfer them as our
banks also do. Will those revenues, when thus deposited,
be "the property of the banks," and therefore subject to
state taxation, and must our assessors include them in
their assessment rolls with the other property of the banks?
By no means ; they are in the hands of agents of the
government and cannot be taxed. And yet no one will
pretend that these depositories will keep and pay over the
identical money received by them. They will treat and
use them as they do other deposits.
If I could take the same view which the opinion does,
and assume that the tax would fall upon the banks only,
and not upon the treasury of the state, I should have no
further interest in the question, and should pay no further
attention to it. But knowing as I do what both parties
understand to be their relations — that no decision can
change that fact — that if the state assents to the payment
of the tax it must reimburse the banks — and that the tax
will therefore fall, not upon " sources of revenue," but
directly upon the revenue itself, which the state lias col¬
lected and received into its treasury, it becomes my im¬
perative duty, as the financial officer of the state, to
protest, as I do most earnestly against it. If you may
annoy the state government by taking a part of its reve¬
nues, you may destroy it by taking the whole. "The
power to tax," says Makshall, " involves the power to
destroy."
The friends of the administration in this state, are obliged
constantly to defend it against clamorous and unfounded
charges by its enemies, of wanton violations of the rights
14
of the states. Is it not unwise as well as wrong to place
them in a position where they will all be forced to admit
one of the chargt* at least to be well founded?
I might pursue the subject much further. I had intended
to refer to several other statutes, but it cannot be neces¬
sary, and my letter is already too long. 1 hope that you
will see the propriety of relieving the state treasury from
this tax, not because of the amount, but because of the
principle involved ; and that you will so dispose of the
matter that we shall both be able to say, with Chief Justice
Marshall, in the case referred to : "We have a principle
which is safe for the States and safe for the Union. We are
relieved as we ought to be from clashing sovereignty; from
interfering powers ; from the incompatibility of a right in
one government to destroy what there is a right in another
to preserve."
I am, with great respect, your obedient servant,
LUCIUS ROBINSON,
Comptroller.
332.1
.973
N567S