WILLIAM GOUGE, ADVISOR TO PRESIDENT JACKSON,
ON THE PRINCIPLES OF THE BANKING SYSTEM
1833

[from “A Short History of Paper-Money and Banking in the United States and an Inquiry into the Principles of the System,” I, 135 ff]

SUMMARY

To place the subject fairly before the reader, we shall bring together the principal propositions that have been supported in this essay, and leave the decision to his candid judgment.

We have maintained:

1. That real money is that valuable by reference to which the value of other articles is estimated, and by the instrumentality of which they are circulated. It is a commodity, done up in a particular form to serve a particular use, and does not differ essentially from other items of wealth.

2. That silver, owing to its different physical properties, the universal and incessant demand for it, and the small proportion the annual supply bears to the stock on hand, is as good a practical standard of value as can reasonably be desired. It has no variations except such as necessarily arise from the nature of value.

3. That real money diffuses itself through different countries, and through different parts of a country, in proportion to the demands of commerce. No prohibitions can prevent its departing from countries where wealth and trade are declining; and no obstacle, except spurious money, can prevent its flowing into countries where wealth and trade are increasing.

4. That money is the tool of all trades, and is, as such, one of the most useful of productive instruments, and one of the most valuable of labor-saving machines.

5. That bills of exchange and promissory notes are a mere commercial medium, and are, as auxiliaries of gold and silver money, very useful: but they differ from metallic money in having no inherent value, and in being evidences of debt. The expressions of value in bills of exchange and promissory notes, are according to the article which law or custom has made the standard; and the failure to pay bills of exchange and promissory notes, does not affect the value of the currency, or the standard by which all contracts are regulated.

6. That Bank notes are mere evidences of debt due by the Banks, and in this respect differ not from the promissory notes of the merchants; but [833] being received in full of all demands, they become to all intents and purposes the money of the country.

7. That Banks owe their credit to their charters; for if these were taken away, not even their own stockholders would trust them.

8. That the circulating quality of Bank notes is in part owing to their being receivable in payment of dues to government; in part to the interest which the debtors to Banks and Bank stockholders have in keeping them in circulation; and in part to the difficulty, when the system is firmly established, of obtaining metallic money.

9. That so long as specie payments are maintained, there is a limit on Bank issues; but, this is not sufficient to prevent successive "expansions" and "contractions," which produce ruinous fluctuations of prices; while the means by which Bank medium is kept "convertible," inflict great evils on the community.

10. That no restriction which can be imposed on Banks, and no discretion on the part of the directors, can prevent these fluctuations; for Bank credit, as a branch of commercial credit, is affected by all the causes, natural and political, that affect trade, or that affect the confidence man has in man.

11. That the "flexibility" or "elasticity" of Bank medium is not an excellence, but a defect, and that "expansions" and "contractions" are not made to suit the wants of the community, but from a simple regard to the profits and safety of the Banks.

12. That the uncertainty of trade produced by these successive 'expansions" and "contractions," is but one of the evils of the present system. That the Banks cause credit dealings to be carried to an extent that is highly pernicious-that they cause credit to be given to men who are not entitled to it, and deprive others of credit to whom it would be useful.

13. That the granting of exclusive privileges to companies, or the exempting of companies from liabilities to which individuals are subject, is repugnant to the fundamental principles of American government; and that the Banks, inasmuch as they have exclusive privileges and exemptions, and have the entire control of credit and currency, are the most pernicious of money corporations.

14. That a nominal responsibility may be imposed on such corporations, but that it is impossible to impose on them an effective responsibility. They respect the laws and public opinion so far only as is necessary to promote their own interest.

15. That on the supposition most favorable to the friends of the Bonking System, the whole amount gained by the substitution of Bank medium for gold and silver coin, is equal only to about forty cents per [834] annum for each individual in the country; but that it will be found that nothing is in reality gained by the nation, if due allowance be made for the expense of supporting three or four hundred Banks, and for the fact that Bank medium is a machine which performs its work badly.

16. That some hundreds of thousands of dollars are annually extracted from the people of Pennsylvania, and some millions from the people of the United States, for the support of the Banks, insomuch as through Banking the natural order of things is reversed, and interest paid to the Banks on evidences of debt due by them, instead of interest being paid to those who part with commodities in exchange for Bank notes.

17. That into the formation of the Bank capital of the country, very little substantial wealth has ever entered, that capital having been formed principally out of the promissory notes of the original subscribers, or by other means which the operations of the Banks themselves have facilitated. They, who have bought the script of the Banks at second-hand, may have honestly paid cent, per cent, for it; but what they have paid has gone to those from whom they bought the script, and does not form any part of the capital of the Banks.

18. That if it was the wish of the legislature to promote usurious dealings, it could not well devise more efficient means than incorporating paper-money Banks. That these Banks, moreover, give rise to many kinds of stock-jobbing, by which the simple-minded are injured and the crafty benefited.

19. That many legislators have in voting for Banks, supposed that they were promoting the welfare of their constituents; but the prevalence of false views in legislative bodies in respect to money corporations and paper-money, is to be attributed chiefly to the desire certain members have to make money for themselves, or to afford their political partisans and personal friends opportunities for speculation.

20. That the banking interest has a pernicious influence on the periodical press, on public elections, and the general course of legislation. This interest is so powerful, that the establishment of a system of sound currency and sound credit is impracticable, except one or other of the political parties into which the nation is divided, makes such an object its primary principle of action.

21. That through the various advantages which the system of incorporated paper-money Banking has given to some men over others, the foundation has been laid of an artificial inequality of wealth, which kind of inequality is, when once laid, increased by all the subsequent operations of society.

22. That this artificial inequality of wealth, adds nothing to the [835] substantial happiness of the rich, and detracts much from the happiness of the rest of the community. That its tendency is to corrupt one portion of society, and debase another.

23. That the sudden dissolution of the Banking System, without suitable preparation, would put an end to the collection of debts, destroy private credit, break up many productive establishments, throw much of the property of the industrious into the hands of speculators, and deprive laboring people of employment.

24. That the system can be got rid of without difficulty, by prohibiting, after a certain day, the issue of small notes, and by proceeding gradually to those of the highest denomination.

25. That the feasibility of getting rid of the system, is further proved by the fact, that the whole amount of Bank notes and Bank credits, is, according to Mr. Gallatin's calculation, only about one hundred and nine million dollars. By paying ten or eleven millions a year, the whole can be liquidated in the term of ten years. If, however, twenty or thirty years should be required for the operation, the longest of these is but a short period in the lifetime of a nation.

26. That it has not been solely through the under-valuation of gold at the mint, that eagles and half-eagles have disappeared. The free use of Bank notes is the chief cause of the disappearance of gold. Nevertheless, a new coinage of pieces containing four and eight, or five and ten dollars' worth of gold is desirable, to save the trouble of calculating fractions. The dollar being the money of contract and account, no possible confusion or injustice can be produced by an adjustment of the gold coinage to the silver standard.

27. That incorporating a paper-money Bank is not the "necessary and proper," or "natural and appropriate" way of managing the fiscal concerns of the Union; but that the "necessary and proper," or " 'natural and appropriate" way, is by sub-treasury offices.

28. That incorporating a paper-money Bank is not "the necessary and proper," or "natural and appropriate" way of correcting the evils occasioned by the State Banks, inasmuch as a National Bank, renting on the same principles as the State Banks, must produce similar evils.

29. That "convertible" paper prevents the accumulation of such a stock of the precious metals as will enable the country to bear transitions from peace to war, and insure the punctual payment of war taxes; and that the "necessary and proper," or "natural and appropriate" way of providing for all public exigencies, is by making the government a solid money government, as was intended by the framers of the constitution.

30. That if Congress should, from excessive caution, or some less [836] commendable motive, decline passing the acts necessary to insure the gradual withdrawal of Bank notes, they may greatly diminish the evils of the system, by declaring that nothing but gold and silver shall be received in payment of duties, and by making the operations of the government entirely distinct from those of the Banks. 31.   That on the abolition of incorporated paper-money Banks, private Bankers will rise up, who will receive money on deposit, and allow interest on the same, discount promissory notes, and buy and sell bills of exchange. Operating on sufficient funds, and being responsible for their engagements in the whole amount of their estates, these private Bankers will not by sudden and great "expansions" and "curtailments" derange the whole train of mercantile operations. In each large city, an office of deposit and transfer, similar to the Bank of Hamburgh, will be established, and we shall thus secure all the good of the present Banking System, and avoid all its evils.

32. That if the present system of Banking and paper-money shall continue, the wealth and population of the country will increase from natural causes, till they shall be equal for each square mile to the wealth and population of Europe. But with every year, the state of society in the United States will more nearly approximate to the state of society in Great Britain. Crime and pauperism will increase. A few men will be inordinately rich, some comfortable, and a multitude in poverty. This condition of things will naturally lead to the adoption of that policy which proceeds on the principle that a legal remedy is to be found for each social evil, and nothing left for the operations of nature. This kind of legislation will increase the evils it is intended to cure.

33. That there is reason to hope, that on the downfall of moneyed corporations, and the substitution of gold and silver for Bank medium, sound credit will take the place, of unsound, and legitimate enterprise the place of wild speculation. That the moral and intellectual character of the people will be sensibly though gradually raised, and the causes laid open of a variety of evils under which society is now suffering. That the sources of legislation will, to a certain extent, be purified, by taking from members of legislative bodies inducements to pass laws for the special benefit of themselves, their personal friends and political partisans. That the operation of the natural and just causes of wealth and poverty, will no longer be inverted, but that each cause will operate in its natural and just order, and produce its natural and just effect-wealth becoming the reward of industry, frugality, skill, prudence, and enterprise, and poverty the punishment of few except the indolent and prodigal. [837]

WILLIAM GOUGE, A SHORT HISTORY OF PAPER-MONEY AND BANKING, 1833

CHAPTER I

Of the Medium of Trade, before the Introduction of Paper-Money

The first settlers of a country may be much in want of capital, but they do not need a great sum of money as a medium of domestic trade. A few exchanges of products for gold and silver coin, will regulate barter transactions with sufficient accuracy for general dealings. A great portion of the stock of money which the original emigrants brought with them, was therefore soon exchanged for the comforts and conveniences which Europe could supply, and trade by barter became the custom of the country.

If the government had not interfered, all would have been well. But as early as 1618, as is stated by Holmes, in his American Annals, Governor Argall of Virginia, ordered "that all goods should be sold at an advance of 25 percent, and tobacco taken in payment at three shillings per pound, and not more or less, on the penalty of three years servitude to the colony." [1]

In 1641, as we learn from the same authority, the General Court of Massachusetts "made orders about payment of debts, setting corn at the usual price, and making it payable for all debts which should arise after a time prefixed." In 1643, the same General Court ordered "that wampompeag should pass current in the payment of debts to the amount of forty shillings, the white at eight a penny, the black at four a penny, except for county rates."

Wampompeag being an article of traffic with the Indians, had a value in domestic trade, but an attempt to fix its value by law was an absurdity, [838] and making it a legal tender was something worse than absurdity. The measure was, however, in perfect accordance with the orders given by the General Court in 1633, declaring, "that artificers, such as carpenters and masons, should not receive more than two shillings a day, and proportion-ably, and that merchants should not advance more than four pence in the shilling above what their goods cost in England."

In Pennsylvania, as well as in the other colonies, a considerable traffic was carried on by barter. In the year 1700, or about that time, a proposition was brought before the General Assembly, to make domestic products a legal tender, at their current rates. The proposition was rejected. But Holmes states that, in Maryland, as late as the year 1732, an act was passed "making tobacco a legal tender at one penny a pound, and Indian corn at twenty pence a bushel."

The colonists had hardly become numerous enough to require more than two or three hundred thousand dollars of medium for domestic uses, before specie began to flow in abundantly. Their trade with the West Indies and a clandestine commerce with the Spanish Maine, made silver so plentiful, that, as early as 1652, (thirty years before the foundation of Philadelphia,) a mint was established in New-England for coining [839] shillings, sixpences and three-penny pieces.[2] In 1662 a mint was established in Maryland [3] Gabriel Thomas, in his account of Pennsylvania, published about the year 1698, says silver was more plentiful in that province than in England.

Plentiful, however, as it was, there was not enough to satisfy the wishes of every body. Attempts were, therefore, made to keep the precious metals in the country, by raising the official value of the coin. Virginia, in 1645, prohibited dealings by barter, and established the Spanish piece of eight at six shillings, as the standard currency of that colony. The other colonies affixed various denominations to the dollar, and the country exhibited a singular spectacle. Its money of account was the same nominally as that of England. Its coin was chiefly Spanish and Portuguese. But what was a shilling in Pennsylvania, was more than a shilling in New York, and less than a shilling in Virginia.

In the third year of Queen Anne, an attempt was made to put an end to this confusion, by a Royal Proclamation and act of parliament, fixing the plantation pound at two ounces sixteen pennyweights sixteen grains of silver, of the fineness of common pieces of eight, at six shillings and ten pence halfpenny per ounce; but from various causes, the act proved effective in Barbadoes only. In South Carolina, the dollar was estimated at 4s. 8d., in Virginia and New-England at 6s., in Pennsylvania, New Jersey, and Maryland at 7s. 6d., and in New York and North Carolina at 8s.

These are to be understood as the rates at which the currencies of the different colonies were finally settled. They were varied from time to time to suit the varying views of the lawgivers. [4] Confusion in dealing was [840] thereby introduced, and some injustice was done to individuals: but the chief object of these changes, namely, that of keeping a great stock of the precious metals in the country, was not effected. In proportion as the denominations of the coin were raised, the merchants raised the price of their goods. The laws of nature counteracted the laws of the land. The people exchanged their surplus gold and silver for such things as they wanted still more than gold and silver - leaving just as much money in the country as its domestic trade required, and not one shilling more.

CHAPTER II

Of Provincial Paper-Money

Paper-money was first issued by Massachusetts in 1690. The object was not to supply any supposed want of a medium for trade, but to satisfy the demands of some clamorous soldiers. Other issues were subsequently made, partly with the view of defraying the expenses of government, and partly with a view of making money plenty in every man's pocket. But as the quantity increased, the value diminished, as will be seen by inspecting the following table.

The ill-judged expedition of the Carolinians against St. Augustine, in 1702, entailed a debt of six thousand pounds on that colony, for the discharge of which a bill was passed by the provincial assembly for stamping bills of credit, which were to be sunk in three years by a duty laid upon liquors, skins and furs. For five or six years after the emission, the paper passed in the country at the same value and rate as the sterling money of England.

To defray the expenses of an expedition against the Tuscaroras, and to accommodate domestic trade, the legislature of South Carolina established a public Bank in 1712, and issued forty-eight thousand pounds in bills of credit, called Bank bills, to be lent out on interest on landed and personal [841] security, and to be sunk gradually at the rate of four thousand pounds a year. Soon after the emission of these Bank bills, the rate of exchange and the price of produce rose, advancing in the first year to one hundred and fifty, and in the second to two hundred per cent. By the year 1731, the rate of exchange rose to seven hundred, at which, says Holmes, "it continued with little variation upwards of forty years."

In the year 1723, "the province of Pennsylvania made its first experiment of a paper currency. It issued, in March, fifteen thousand pounds, on such terms as appeared likely to be effectual to keep up the credit of the bills. It made no loans, but on land security, or plate deposited in the loan office: obliged the borrowers to pay five per cent, for the sums they took up; made its bills a tender in all payments, on pain of confiscating the debt, or forfeiting the commodity; imposed sufficient penalties on all persons, who presumed to make any bargain or sale on cheaper terms in case of being paid in gold or silver; and provided for the gradual reduction of the bills, by enacting that one-eighth of the principal, as well as the whole interest, should be annually paid."

Governor Pownall, in his work on the administration of the colonies, bestows high praise on the paper system of Pennsylvania. "I will venture to say," he declares, "that there never was a wiser or a better measure, never one better calculated to serve the interests of an increasing country, that there never was a measure more steadily pursued or more faithfully executed, for forty years together, than the loan office in Pennsylvania, founded and administered by the assembly of that province." Dr. Franklin also bestowed high commendation on the system. And Adam Smith, apparently guided by Governor Pownall and Dr. Franklin, says, "Pennsylvania was always more moderate in its emission of paper-money than any of our other colonies. Its paper currency accordingly is said never to have sunk below the value of the gold and silver which was current in the colony before the first emission of its paper-money."

All things go by comparison. The credit bills of Pennsylvania were so much better than those of the other governments, that there was a demand for them throughout the country as bills of exchange: but it is not a fact that they never sunk below the value of the gold and silver which was current in the colony before the first emission of its paper. The following table taken from an official document to be found in Proud's History of Pennsylvania shows that the paper was never at a less discount than eleven per cent, if gold be taken as the standard, or seven per cent, if silver be the standard. [842]

We have no account of the bullion market in provincial Pennsylvania, subsequent to the year 1738, but this table shows that those who represented to Adam Smith that the paper of the colony suffered no depreciation, were misled by making neither gold nor silver the standard, but by making the paper the standard of itself. As the Pennsylvania pound current never changed its name, they thought it never changed its value [5]. [843]

The following table shows the rate of exchange of the currencies of the different colonies, for 100£ sterling, at two different periods.

The government of Virginia appears not to have issued any paper-money previous to the revolutionary war.

In respect to the paper-money of the colonies generally, we may say, in the language of Adam Smith, "allowing the colony security to be perfectly good, a hundred pounds payable fifteen years hence, in a country where interest is at six percent, is worth little more than forty pounds ready money. To oblige a creditor, therefore, to accept of this as a full payment for a debt of a hundred pounds actually paid down in ready money, was an act of such violent injustice as has scarce, perhaps, been attempted by the government of any other country which pretended to be free. It bears the evident marks of having originally been, what the honest and downright Dr. Douglass assures us it was, a scheme of fraudulent debtors to cheat their creditors. The government of Pennsylvania, indeed, pretended, upon their first emission of paper-money, to render their paper of equal value with gold and silver, by enacting penalties against all those who made any difference in the price of their goods when they sold them for colony paper, and when they sold them for gold and silver: a regulation equally tyrannical, but much less effectual than that which it was meant to support. A positive law may render a shilling a legal tender for a guinea, because it may direct the courts of justice to discharge the debtor who has made that tender. But no positive law can oblige a person who sells goods, and who is at liberty to sell or not to sell as he pleases, to accept of a shilling as equivalent to a guinea in the price of them."

Dr. Hugh Williamson, the historian of North Carolina, is not less emphatic than Adam Smith in denouncing the system.

"Of all the varieties of fraud," he says, "which have been practiced by men who call themselves honest, and wish to preserve a decent appearance, none have been more frequent in legislative bodies than the attempt to pass money for more than its proper value. There are men who conceive that crimes lose their stain, when the offenders are numerous: that in the character of legislators they cannot be rogues: 'defendit numerus.' There are men who would be ashamed to acquire five shillings by stealing, picking a pocket, or robbing on the highway; but they would freely and without blushing assist in passing a law to defraud their creditors of their just demands. There are instances of men being banished from North Carolina for stealing a hog not worth five dollars: while the men who banished them would contend for paying a debt of seven pounds with the value of twenty shillings: the moral sense is depraved by tender laws, or laws that enable the debtor to defraud his creditor, by offering [844] him a fictitious payment. By such laws the mind is alienated from the love of justice, and is prepared for any species of chicane and fraud."

Hutchinson, the historian of Massachusetts, has preserved many curious particulars of the introduction of paper-money into this country, and of its operation on society. After relating the unsuccessful expedition of the Massachusetts troops against Quebec in 1690, he proceeds as follows with his narrative.

"The government was utterly unprepared for the return of the forces. They seem to have presumed, not only upon success, but upon the enemy's treasure to bear the charge of the expedition. The soldiers were upon the point of mutiny for want of their wages. It was utterly impracticable to raise in a few days such a sum as would be necessary. An act was passed for levying the sum, but the men would not stay until it should be brought into the treasury. The extreme difficulty to which the government was thus reduced, was the occasion of the first bills of credit ever issued in the colonies, as a substitute in the place of money. The debt was paid by paper notes from two shillings to ten pounds denomination, which notes were to be received for payment of the tax which was to be levied, and all other payments in the treasury. This was a new expedient. They had better credit than King James' leather-money in Ireland, about the same time. But the notes would not command money, nor any commodities at money price. Sir William Phipps, it is said, exchanged a large sum at par in order to give them credit. The soldiers in general were great sufferers, and could get no more than twelve or fourteen shillings in the pound. As the time of payment of the tax approached, the credit of the notes was raised, and the government allowing five per cent, to those who paid their taxes in notes, they became better than money. This was gain to the possessor, but it did not restore to the poor soldier what he had lost by the discount.

"The government, encouraged by the restoration of credit to their bills, afterwards issued others for charges of government. They obtained good credit at the time of their being issued. The charges of government were paid in this manner from year to year. Whilst the sum was small, silver continued the measure, and bills continued their value. When the charges of government increased, after the second expedition to Canada in 1711, the bills likewise increased, and in the same or greater proportion, the silver and gold were sent out of the country. There being a cry of scarcity of money in 1714, the government caused 50,000£ to be issued, and in 1716, 100,000£, and lent to the inhabitants, to be paid in at a certain [845] period, and in the meantime to pass as money. Lands were mortgaged for security. As soon as the silver and gold were gone, and the bills were the sole instrument of commerce, pounds, shillings, and pence, were altogether ideal, for no possible reason could be assigned why a bill of twenty shillings should bear a certain proportion to any one quantity of silver more than another. Sums in bills were drawing into the treasury from time to time, by the taxes or payment of the loans: but then other sums were continually issuing out, and all the bills were paid and received without any distinction, either in public or private payments, so that, for near forty years together, the currency was in much the same state as if a hundred thousand pounds sterling had been stamped on pieces of leather, or paper of various denominations, and declared to be the money of the government, without any other sanction than this, that when there should be taxes to pay, the treasury would receive this sort of money, and that every creditor should be obliged to receive it from his debtor. Can it be supposed that such a medium could retain its value? In 1702 6s, 8d was equal to an ounce of silver. In 1749 50s was judged equal to an ounce of silver. I saw a five-shilling bill which had been issued in 1690, and was remaining in 1749, and was then equal to eight pence only in the lawful money, and so retained but one-eighth of its original value. Such was the delusion, that not only the bills of the Massachusetts government passed as money, but they received the bills of the governments of Connecticut, New-Hampshire, and Rhode Island also as a currency. The Massachusetts bills passed also in those governments."

By the year 1713, "silver and gold were entirely banished. Of two instruments, one in use in a particular State only, the other with the whole commercial world, it is easy to determine which must leave the particular State and which remain. The currency of silver and gold entirely ceasing, the price of every thing bought or sold was no longer compared therewith, but with paper bills, or rather with mere ideal pounds, shillings, and pence. The rise of exchange with England and all other countries was not attributed to the true cause, the want of a fixed staple medium, but to the general bad state of the trade. Three parties were formed, one very small, which was for drawing in the paper bills and depending upon a silver and gold currency. Mr. Hutchinson, one of the members for Boston, was among the most active of this party. He was an enemy all his life, to a depreciating currency, upon a principle very ancient, but too seldom practiced upon, nil utile quod non honestum, [nothing which is not honest is useful.]… [6] [846]

From the account of the operation of the provincial paper-money of Massachusetts, the reader may judge of its operation in the other colonies; and thereby learn to estimate properly that provision of the United States' Constitution, which forbids any State "to emit bills of credit, pass any law violating the obligation of contracts, or make any thing but gold and silver a legal tender in the payment of debts."

The successful issue of the experiment in Massachusetts did not induce the other governments to take the necessary measures for substituting a metallic for a paper medium. But as the British merchants trading to the colonies were sufferers by the monetary system of the day, an act of parliament was passed in 1763, "to prevent paper bills of credit, hereafter to be issued in any of his Majesty's colonies or plantations in America, from being declared to be a legal tender in payment of money, and to prevent the legal tender of such bills as are now subsisting from being prolonged beyond the periods for calling in and sinking the same."

The preamble to the act declared, with great truth, that by means of paper bills of credit, "debts have been discharged with a much less value than was contracted for, to the great discouragement and prejudice of trade and commerce of his Majesty's subjects, by occasioning confusion in dealings and lessening credit in the said colonies or plantations." The body of the act made void all acts of assembly thereafter passed to establish or keep up such tender; and inflicted a fine of 1,000 pounds (with immediate dismissal and future incapacity to fill any public office or place of trust,) on any governor who should give his assent to such act of legal tender.

This measure caused much murmuring, for the speculating classes of society, who are always the most noisy, liked not to be deprived of so many opportunities of profit as a vacillating currency afforded them. They appear to have had influence enough to prevent the act from being effective in some of the colonies; for we find that ten years after, another act with the same title was passed by the British Parliament.

The two acts together seem to have reduced the paper bills of credit to a very small amount; for Pelatiah Webster, a respectable merchant of Philadelphia, estimates the whole circulating cash of the thirteen States, just before the war, at twelve million dollars, or perhaps, not more than ten million hard dollars in value. "Not more than half." he says, "or at most three-fifths, of the circulating cash in this State (Pennsylvania,) was paper; and I am well convinced that that proportion was not exceeded in the other States where paper-money was circulated."

This provincial paper-money may be regarded as a species of government script, which by an act of tyranny was made a legal tender. It [847] fluctuated in value, according to the changes in the credit of the government by which it was issued, and the amount thrown into the market. Being more liable to great depreciation, it was inferior to Bank paper as money: but its character was better understood by the people. They knew the authority of the government, and the resources of the government. When they were injured, they knew by whom they were injured, if not to what extent.

In one respect the provincial paper-money system had an effect directly opposite to that of the present Banking System. Through the present Banking System, dealings on credit are carried to an extent beyond that in which they are useful, and in which they become highly pernicious. Through the old paper-money system, confidence was destroyed, and credit prevented from spreading to its natural extent.

The profits gained by the governments by the issues of paper-money, enabled them to diminish the regular taxes; but this gain was insignificant, and the evils produced by the system were incalculably great. All that honest men lost by highwaymen, housebreakers, footpads, and horse thieves, was trifling in amount when compared with that which they lost through the instrumentality of the paper-money of the different colonies.

CHAPTER III

Of Continental Money

                                                                                               

According to an estimate by the Register of the Treasury, in 1790, the issues of continental money were as follows, viz:

…On the 31st of May, 1781, the continental bills ceased to circulate as money, but they were afterwards bought on speculation at various prices, from four hundred for one, up to one thousand for one.

The value of continental paper was not the same in different parts of the country. The exchange was, for example, December, 25th, 1779, at [848] thirty-five for one in New-England, New York, the Carolinas, and Georgia, and at forty for one in Pennsylvania, New Jersey, Delaware, Maryland, and Virginia.

An account taken from the books of merchants in Virginia shows that the depreciation there regularly followed that in Philadelphia, though, towards the close, it sometimes lagged a month or more behind. Thus, when exchange was in Philadelphia at one hundred for one, in January, 1781, it was in Virginia at seventy-five for one: and in April, when exchange in Philadelphia was at one hundred and thirty-five for one, it was in Virginia at one hundred for one.

As late as May, 1781, speculations were entered into at Philadelphia, to purchase continental money at two hundred and twenty-five for one, and sell it at Boston at seventy-five for one.

It is worthy of remark "that the depreciation of continental money never stopped the circulation of it. As long as it retained any value at all it passed quick enough: and would purchase hard money or any thing else, as readily as ever, when the exchange was 200 for 1, and when every hope, or even idea, of its being ultimately redeemed at nominal value had entirely vanished."

The facility of raising ways and means, in the early part of the war, by issues of paper, led to much extravagance in the commissary department, and prevented the establishment of a sound system of finance… Our ancestors were lavish of their blood, in defense of their rights. If it was through a wish to save their treasure that they resorted to paper-money, they did not succeed in their object. As a mode of raising revenue, it might be compared to a tax, the expenses of collecting which were many times as great as the sum brought into the treasury. The benefit the government derived from it, was in no way commensurate with the burden it imposed on the people. Most of the loss fell on the Whigs, as it was in their hands the paper depreciated. The Tories, who had from the beginning no confidence in it, made it a rule to part with it as soon as possible.

This continental money was, in its true character, a simple evidence of debt due by the government: and may, as such, in the first stage of its operation, be compared to the forced loans which the potentates of Europe have at times extracted from their subjects. As a forced currency, it may be compared to the base coin which the same potentates have issued in other seasons of difficulty. The resort to it can be justified (if it can be justified at all) only on the plea of state necessity-a plea so easily made that it ought never to be admitted without close examination. [849]

CHAPTER IV

Of the Bank of North America

It is a common opinion that the Bank of North America rendered essential service during our revolutionary struggle-that, without it, the achievement of independence would have been difficult, if not impossible. Assertions to this effect have been made with so much confidence that we once believed them to be well-founded; but on examination we find-

First. That the capture of Cornwallis, which is described by historians as the closing scene of the Revolutionary War, took place on the 9th of October 1781, and that the Bank did not go into operation till January 7^th 1782.

Secondly. That the whole amount of expenditures of the U. S. Government in the year 1782, was only three million six hundred thousand dollars, and in 1783 only three million two hundred thousand dollars. Large loans were negotiated in Europe in these years; "and such a conviction of the necessities of public supplies generally took place through the States, that considerable sums were obtained by a tax on polls and real estates."

Thirdly. The whole amount subscribed by individuals to the Bank did not, as appears from the concurrent testimony of Mr. Robert Morris and Mr. Gouverneur Morris, exceed 70,000 dollars.

Fourthly. From statements made by Mr. Robert Morris, ir public debate in the Legislature of Pennsylvania, in the year 1786, it appears that the advances made by the Bank to the Government, above the amount of silver money actually paid in by the Government, never did exceed 165,000 dollars, and for a part of the time did not amount to 50,000 dollars [7]. [85O]

The reader, on duly considering these facts, will probably be convinced that the services rendered by the Bank of North America, during our revolutionary struggle, have been grossly exaggerated.

From the beginning of the year 1780, till the close of the war, hard money was very plenty. This "was occasioned by large sums, by various means, coming from the English army at New York, and spreading through the States; also by large sums remitted by France to their army and navy here; also by large importations of hard money from the Havanna and other places abroad; so that hard money was never more plenty nor more easily collected than at that time." In a note to an essay of later date, Mr. Webster says, "the States were really overrun with abundance of cash: the French and English armies, our foreign loans, Havanna trade &c, had filled the country with money."

"It has been asked," says Lord Sheffield, "what has become of the money which we have sent during the war to America? Some is come back -a considerable part is the circulating cash within our lines. Many British subjects in New York have very large sums in their possession. The Dutch and Germans, whose number is not inconsiderable, have hoarded up -and it is believed considerable sums are concealed.

"France sent (not included in the debt) above 600,000 pounds sterling in specie to America, being obliged to send cash." [8]

The operations of the war caused such a drain of specie from Europe, that the Bank of England was brought into jeopardy, and the Caisse d' Escompte at Paris actually suspended payments in 1783: and such a flux of specie into the United States, that, as Mr. Webster observes, "hard money was never more plenty or more easily collected."

Such being the state of the money market, it is difficult to believe that the Government might not, if the Bank had not been established, have obtained a loan of 50,000 to 165,000 dollars from some other source. It does not appear that the Bank ever made advances to the Government, except on the best security. For at least 80,000 dollars of the amount, the Suite of Pennsylvania was guarantee. For the residue of the amount, the Government might have pledged the proceeds of the taxes, or bills on Europe: and on the same security, it is probable, individuals would have made the advances, especially as money was so abundant, and the news of peace confidently expected.

The truth is, that the project of establishing a Bank in Philadelphia had been conceived by Mr. Robert Morris, before the commencement of the [851] war, as appears from his own declaration: [9] and he had entered into negotiations in Europe with a view to effect this object. But a project for a Bank about the year 1763, had been vigorously opposed on the ground that it would give a few men a monopoly of trade: and it is probable that Mr. Robert Morris's project would have encountered severe opposition, if it had not been brought forward as a fiscal measure and at a time when neither the Legislature nor the people could give it that consideration it deserved. He submitted his plan to Congress in May, 1780, and on the 26th of the same month it was approved by that body. "Yet," he says, "until the month of September or October following, there were not more subscriptions in the whole, than amounted to about 70,000 dollars. During the time, one of his most Christian Majesty's frigates arrived at Boston, and brought a remittance in specie of about 470,000 dollars. The sum was brought to Philadelphia and deposited in the vaults of the Bank. I determined from the moment of its arrival, to subscribe on behalf of the United States, for those shares in the Bank which remained vacant: but such was the amount of the public expenditures, that notwithstanding the utmost care and caution to keep this money, nearly one-half of the sum was exhausted before the institution could be organized. In November 1781, the president and directors of the Bank were elected: they obtained a charter of incorporation from Congress - and opened the Bank for transacting business in January. 1782. I subscribed the sum then remaining in the treasury, being about 254,000 dollars, into the Bank stock, per account of the United States, which became thereby the principal stockholder." [10]

As is remarked by Mr. Gouverneur Morris, the sum subscribed by Government may be said to have been paid in with one hand, and borrowed with the other, leaving the Bank but 70,000 dollars at most for its proper operations. On this amount it undertook to make advances to the Government and to individuals; but as the experience of the evils of continental money was fresh in the minds of the people, some difficulty was encountered in giving currency to the notes of the Bank. To remove this "prejudice" the gentlemen who were interested in the institution, were, as we have learned from undoubted private authority, in the practice of requesting people from the country and laboring men about town, to go to the Bank and get silver in exchange for notes. When they went on this errand of neighborly kindness, as they thought it, they found a display of silver on the counter, and men employed in raising boxes containing silver, or supposed to contain silver, from the cellar into the Banking room, or lowering them from the Banking room into the cellar. By contrivances like these, the Bank obtained the reputation of possessing immense wealth; but its hollowness was several times nearly made apparent, especially on one occasion, when one of the co-partners withdrew a deposit of some five or six thousand dollars, when the whole specie stock of the Bank did not probably exceed twenty thousand.

By these means, and by the assistance of the United States Government, the notes of the Bank became current; and so profitable was the business that the early dividends were at the rate of from 12 to 16 per cent, per annum. This naturally created a desire in ethers to share in so very lucrative a trade. A project was therefrom formed for establishing a second Bank, to be called the Bank of Pennsylvania. This, they who were interested in the Bank of North America strenuously opposed, fearing the effect of a rival institution in Philadelphia. To prevent its being established, they opened their books for additional subscriptions; but not without murmuring loudly at the hardship of receiving new partners [11]. [854]

In the year 1784, the Bank did a very extensive business; and by the beginning of 1785, the effects of its operations began to be very apparent. They are such as Banking has always produced-a temporary plentiful-ness of money, followed by great scarcity, usury, ruin to the many, riches to the few. These effects were ably set forth in petitions to the Assembly, from the inhabitants of Philadelphia, and those of the counties of Chester and Bucks, presented on the 21st and 23rd of March, praying for a repeal of the charter of the Bank. Those petitions were referred to a committee, who, in a report of the 25th of the same month, fully sustained the allegations of the petitioners, and recommended a repeal of the charter. This recommendation was carried into effect, at the ensuing session, on the 13th of September, 1785. Thus we find that the first Bank established in this country produced so much evil, that its charter was taken from it in less than four years after it had commenced operations.

The Bank, however, claiming the right of prosecuting its business under the act of Congress, continued its operations, though on a more moderate scale. In 1786, an attempt was made by its friends to obtain a renewal of the charter from the State of Pennsylvania, but it was successfully opposed by Wrn. Findlay of Westmoreland, Mr. Smilie of the same county, and other leading democrats. It is difficult, however, for the people long to withstand the efforts of a powerful monied interest: and it being pleaded, with some show of reason, that the forms of the Constitution had not been properly regarded in taking away the charter, and many persons fearing a return of the old paper money system, the Bank was re-incorporated on the 17th of March, 1787, with limited powers, and for fourteen years. By successive acts of the Legislature, it has been continued in existence to the present day.

CHAPTER V

Of the Old Bank of the United States

"Let the Americans," said Wm. Pitt, "adopt their funding system, and go into their Banking institutions, and their boasted independence will be a mere phantom."

No small number of Americans were of a similar opinion: but it was contended by others, that if the revolutionary debt was not funded, injustice would be done to the public creditors. Out of this funding system sprung the old Bank of the United States, for three-fourths of its capital consisted of public stocks. The Bank, its friends averred, was necessary to support the public credit, and aid the fiscal operations of the Federal Government. Its opponents contended that it was anti-republican in its tendency, and that the Constitution gave Congress no power to establish such an institution.

The period immediately succeeding the Revolutionary War, was, in a peculiar sense, an age of speculation. Trafficking in soldier's certificates, in the public lands, and in the various evidences of the public debt, was the business of many who had money, and of many who had not. Perhaps the fortunes some thereby acquired, may have excited envy, and thus increased the opposition to the system which had its origin with some in political, and with others, in moral reasons. Be this as it may, the Bank of the United States was regarded as the cap-stone of a policy which was viewed as very objectionable: and the democratic journals of the day abounded in what one of our most respectable authors calls "abuse of the Banking and funding system."

Mr. Jefferson's opposition to Banks was of the most decided character. In his preface to Destutt Tracy's Political Economy, he denounces them as parisitical institutions: and he seldom let slip an opportunity of expressing his abhorrence of their whole scheme of operations. His objections to the Bank of the United States on constitutional grounds were equally strong. "I consider," he says, "the foundation of the Constitution as laid on this ground, that "all powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States [855] or the people." To take a single step beyond the boundaries thus specially drawn around the power of Congress, is to take possession of a boundless field of power, no longer susceptible of definition. The incorporation of a Bank, and other powers assumed by this bill, have not, in my opinion, been delegated to the United States by the Constitution." After showing that the powers were not among those specially enumerated, nor in any of the general phrases, he says "It is known that the very power now proposed as a means was rejected as an end by the Convention which formed the Constitution: a proposition was made to them to authorize Congress to open canals, and an emendatory one to empower them to incorporate; but the whole was rejected, and one of the reasons urged in the debate was, that then they would have power to create a Bank, which would render the great cities, where there were prejudices or jealousies on this subject, adverse to the reception of the Constitution."

The Bank was not established by a strict party vote, for eleven out of thirty-nine who voted for it were democrats, and six out of twenty, who opposed it, were federalists; but it afterwards became, as Mr. Niles says, one of the landmarks of party, and, in the second Congress, a resolution declaring the Bank charter unconstitutional, was within one vote of passing the House.

The hostility of the Democratic Party to the Bank was but little abated for many years; but, as the time approached for the expiration of the charter, enmity to the institution gave way, in a great degree, to fear of the distress which the winding up of its affairs would produce. The pens of numerous scribes were employed in portraying the manifold evils which must come upon the country, and deputations of merchants and mechanics were sent from Philadelphia to Washington, to beg Congress to avert the impending danger.

The predictions that were so confidently made of the ruin that would overspread the land, if the charter were not renewed, had their intended effect on some of the democratic members. But, after a full discussion, the bill was indefinitely postponed on the 24th of January 1811, in the House of Representatives, by a vote of 65 to 64. The National Intelligencer said, on recording the vote, that if the question had not been on the indefinite postponement, but on the passage of the bill, the majority would have been much greater.

Another bill was brought before the Senate; but, on the 20th of February, the first section was struck out by the casting vote of the Vice President, George Clinton.

The Senate gave this vote, which was equivalent to a rejection of the bill, only eleven days before the charter expired. The Bank made application [856] in this interval for such an extension of its charter as would enable it to wind up its concerns. But the Committee of the House to whom the memorial was referred, reported, through their Chairman, Mr. Henry Clay, "that, holding the opinion, (as a majority of the Committee do,) that the Constitution did not authorize Congress originally to grant the charter, it follows as a necessary consequence of that opinion, than an extension of it, even under the restrictions contemplated by the stockholders, is equally repugnant to the Constitution."

Trustees were then appointed, and they proceeded so rapidly in winding up the concerns of the Bank, that on the 1st of June, 1812, they paid over to the stockholders 70 per cent, of the capital stock, and 18 per cent, more on the 1st of October. [12]

This was a rapid collection of the debts due to the institution, inasmuch as it enabled the trustees to pay 88 per cent, of the capital stock, in about a year and a half; but it did not produce the universal ruin with which the country had been threatened. "Many persons," said Dr. Seybert, writing in 1816, "viewed a dissolution of the late Bank of the United States as a national calamity; it was asserted that a general bankruptcy must follow that event. The fact was otherwise: every branch of industry continued uninterrupted-no failures in the mercantile community were attributable to that occurrence."

CHAPTER VI

Of Banking from 1790 to 1810-11

In Vol. Ill of the American edition of the Edinburgh Cyclopedia, published in 1813, the following table is given, "to exhibit in one view the names of the Banks most deserving of notice, the time of their institution, and the amount of their capital." The table is not complete, but it shows the time in which the Banking system was introduced into the different States.