March 3, 1881: Veto Message Regarding Economic Legislation

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To the House of Representatives:
Having considered the bill entitled "An act to facilitate the refunding of the national debt," I am constrained to return it to the House of Representatives, in which it originated, with the following statement of my objections to its passage:
The imperative necessity for prompt action and the pressure of public duties in this closing week of my term of office compel me to refrain from any attempt to make a full and satisfactory presentation of the objections to the bill.
The importance of the passage at the present session of Congress of a suitable measure for the refunding of the national debt which is about to mature is generally recognized. It has been urged upon the attention of Congress by the Secretary of the Treasury and in my last annual message. If successfully accomplished, it will secure a large decrease in the annual interest payment of the nation, and I earnestly recommend, if the bill before me shall fail, that another measure for this purpose be adopted before the present Congress adjourns.
While, in my opinion, it would be unwise to authorize the Secretary of the Treasury, in his discretion, to offer to the public bonds bearing 3 1/2 per cent interest in aid of refunding, I should not deem it my duty to interpose my constitutional objection to the passage of the present bill if it did not contain, in its fifth section, provisions which, in my judgment, seriously impair the value and tend to the destruction of the present national banking system of the country. This system has now been in operation almost twenty years. No safer or more beneficial banking system was ever established. Its advantages as a business are free to all who have the necessary capital. It furnishes a currency to the public which for convenience and security of the bill holder has probably never been equaled by that of any other banking system. Its notes are secured by the deposit with the Government of the interest-bearing bonds of the United States.
The section of the bill before me which relates to the national banking system, and to which objection is made, is not an essential part of a refunding measure. It is as follows:
SEC. 5. From and after the 1st day of July, 1881, the 3 per cent bonds authorized by the first section of this act shall be the only bonds receivable as security for national-bank circulation or as security for the safe-keeping and prompt payment of the public money deposited with such banks; but when any such bonds deposited for the purposes aforesaid shall be designated for purchase or redemption by the Secretary of the Treasury, the banking association depositing the same shall have the right to substitute other issues of the bonds of the United States in lieu thereof: Provided, That no bond upon which interest has ceased shall be accepted or shall be continued on deposit as security for circulation or for the safe-keeping of the public money; and in case bonds so deposited shall not be withdrawn, as provided by law, within thirty days after the interest has ceased thereon, the banking association depositing the same shall be subject to the liabilities and proceedings on the part of the Comptroller provided for in section 5234 of the Revised Statutes of the United States: And provided further, That section 4 of the act of June 20, 1874, entitled "An act fixing the amount of United States notes, providing for a redistribution of the national-bank currency, and for other purposes," be, and the same is hereby, repealed, and sections 5159 and 5160 of the Revised Statutes of the United States be, and the same are hereby, reenacted.
Under this section it is obvious that no additional banks will hereafter be organized, except possibly in a few cities or localities where the prevailing rates of interest in ordinary business are extremely low. No new banks can be organized and no increase of the capital of existing banks can be obtained except by the purchase and deposit of 3 per cent bonds. No other bonds of the United States can be used for the purpose. The one thousand millions of other bonds recently issued by the United States, and bearing a higher rate of interest than 3 per cent, and therefore a better security for the bill holder, can not after the 1st of July next be received as security for bank circulation. This is a radical change in the banking law. It takes from the banks the right they have heretofore had under the law to purchase and deposit as security for their circulation any of the bonds issued by the United States, and deprives the bill holder of the best security which the banks are able to give by requiring them to deposit bonds having the least value of any bonds issued by the Government.
The average rate of taxation of capital employed in banking is more than double the rate of taxation upon capital employed in other legitimate business. Under these circumstances, to amend the banking law so as to deprive the banks of the privilege of securing their notes by the most valuable bonds issued by the Government will, it is believed, in a larger part of the country, be a practical prohibition of the organization of new banks and prevent the existing banks from enlarging their capital. The national banking system, if continued at all, will be a monopoly in the hands of those already engaged in it, who may purchase the Government bonds bearing a more favorable rate of interest than the 3 per cent bonds prior to next July.
To prevent the further organization of banks is to put in jeopardy the whole system, by taking from it that feature which makes it, as it now is, a banking system free upon the same terms to all who wish to engage in it. Even the existing banks will be in danger of being driven from business by the additional disadvantages to which they will be subjected by this bill. In short, I can not but regard the fifth section of the bill as a step in the direction of the destruction of the national banking system.
Our country, after a long period of business depression, has just entered upon a career of unexampled prosperity.
The withdrawal of the currency from circulation of the national banks, and the enforced winding up of the banks in consequence, would inevitably bring serious embarrassment and disaster to the business of the country. Banks of issue are essential instruments of modern commerce. If the present efficient and admirable system of banking is broken down, it will inevitably be followed by a recurrence to other and inferior methods of banking. Any measure looking to such a result will be a disturbing element in our financial system. It will destroy confidence and surely check the growing prosperity of the country
Believing that a measure for refunding the national debt is not necessarily connected with the national banking law, and that any refunding act would defeat its own object if it imperiled the national banking system or seriously impaired its usefulness, and convinced that section 5 of the bill before me would, if it should become a law, work great harm, I herewith return the bill to the House of Representatives for that further consideration which is provided for in the Constitution.