only. Neither the terms of the scheme, nor their own prudence could ever
permit them to add to the circulation in the same, or any other way, for
the supplies of the succeeding years of the war. These succeeding years
then are to be left unprovided for, and the means of doing it in a great
measure precluded.
4. The individual subscribers, on paying their own five millions of cash
to Congress, become the depositories of ten millions of stock belonging
to Congress, five millions belonging to the States, and five millions to
themselves, say twenty millions, with which, as no one has a right ever
to see their books, or to ask a question, they may choose their time
for running away, after adding to their booty the proceeds of as much of
their own notes as they shall be able to throw into circulation.
5. The subscribers may be one, two, or three, or more individuals, (many
single individuals being able to pay in the five millions,) whereupon
this bank oligarchy or monarchy enters the field with ninety millions
of dollars, to direct and control the politics of the nation; and of the
influence of these institutions on our politics, and into what scale it
will be thrown, we have had abundant experience. Indeed, England herself
may be the real, while her friend and trustee here shall be the nominal
and sole subscriber.
6. This state of things is to be fastened on us, without the power of
relief, for forty or fifty years. That is to say, the eight millions
of people now existing, for the sake of receiving one dollar and
twenty-five cents apiece at five per cent, interest, are to subject the
fifty millions of people who are to succeed them within that term, to
the payment of forty-five millions of dollars, principal and interest,
which will be payable in the course of the fifty years.
7. But the great and national advantage is to be the relief of the
present scarcity of money, which is produced and proved by,
1. The additional industry created to supply a variety of articles for
the troops, ammunition, he.
2. By the cash sent to the frontiers, and the vacuum occasioned in the
trading towns by that.
3. By the late loans.
4. By the necessity of recurring to shavers with good paper, which the
existing banks are not able to take up; and
5. By the numerous applications for bank charters, showing that an
increase of circulating medium is wanting.
Let us examine these causes and proofs of the want of an increase of
medium, one by one.
1. The additional industry created to supply a variety of articles for
troops, ammunition, &c. Now I had always supposed that war produced
a diminution of industry, by the number of hands it withdraws from
industrious pursuits, for employment in arms &c. which are totally
unproductive. And if it calls for new industry in the articles of
ammunition and other military supplies, the hands are borrowed from
other branches on which the demand is slackened by the war; so that it
is but a shifting of these hands from one pursuit to another.
2. The cash sent to the frontiers occasions a vacuum in the trading
towns, which requires a new supply. Let us examine what are the calls
for money to the frontiers. Not for clothing, tents, ammunition, arms,
which are all bought in the trading towns. Not for provisions; for
although these are bought partly in the intermediate country, bank-bills
are more acceptable there than even in the trading towns. The pay of
the army calls for some cash; but not a great deal, as bank-notes are as
acceptable with the military men, perhaps more so; and what cash is sent
must find its way back again, in exchange for the wants of the upper
from the lower country. For we are not to suppose that cash stays
accumulating there for ever.
3. This scarcity has been occasioned by the late loans. But does the
government borrow money to keep it in their coffers? Is it not instantly
restored to circulation by payment for its necessary supplies? And are
we to restore a vacuum of twenty millions of dollars by an emission of
ninety millions?
4. The want of medium is proved by the recurrence of individuals with
good paper to brokers at exorbitant interest; and
5. By the numerous applications to the State governments for additional
banks; New York wanting eighteen millions, Pennsylvania ten millions,
&c. But say more correctly, the speculators and spendthrifts of New York
and Pennsylvania, but never consider them as being the States of New
York and Pennsylvania. These two items shall be considered together.
It is a litigated question, whether the circulation of paper, rather
than of specie, is a good or an evil. In the opinion of England and
of English writers it is a good; in that of all other nations it is an
evil; and excepting England and her copyist, the United States, there is
not a nation existing, I believe, which tolerates a paper circulation.
The experiment is going on, however, desperately in England, pretty
boldly with us, and at the end of the chapter, we shall see which
opinion experience approves: for I believe it to be one of those cases
where mercantile clamor will bear down reason, until it is corrected by
ruin. In the mean time, however, let us reason on this new call for a
national bank.
After the solemn decision of Congress against the renewal of the charter
of the bank of the United States, and the grounds of that decision (the
want of constitutional power), I had imagined that question at rest, and
that no more applications would be made to them for the incorporation
of banks. The opposition on that ground to its first establishment, the
small majority by which it was overborne, and the means practised
for obtaining it, cannot be already forgotten. The law having passed,
however, by a majority, its opponents, true to the sacred principle
of submission to a majority, suffered the law to flow through its term
without obstruction. During this, the nation had time to consider
the constitutional question, and when the renewal was proposed, they
condemned it, not by their representatives in Congress only, but by
express instructions from different organs of their will. Here then
we might stop, and consider the memorial as answered. But, setting
authority apart, we will examine whether the legislature ought to comply
with it, even if they had the power.
Proceeding to reason on this subject, some principles must be premised
as forming its basis. The adequate price of a thing depends on the
capital and labor necessary to produce it. (In the term capital, I mean
to include science, because capital as well as labor has been employed
to acquire it.) Two things requiring the same capital and labor should
be of the same price. If a gallon of wine requires for its production
the same capital and labor with a bushel of wheat, they should be
expressed by the same price, derived from the application of a common
measure to them. The comparative prices of things being thus to be
estimated, and expressed by a common measure, we may proceed to observe,
that were a country so insulated as to have no commercial intercourse
with any other, to confine the interchange of all its wants and supplies
within itself, the amount of circulating medium, as a common measure
for adjusting these exchanges, would be quite immaterial. If their
circulation, for instance, were of a million of dollars, and the annual
produce of their industry equivalent to ten millions of bushels of
wheat, the price of a bushel of wheat might be one dollar. If, then, by
a progressive coinage, their medium should be doubled, the price of a
bushel of wheat might become progressively two dollars, and without,
inconvenience. Whatever be the proportion of the circulating medium to
the value of the annual produce of industry, it may be considered as the
representative of that industry. In the first case, a bushel of wheat
will be represented by one dollar; in the second, by two dollars. This
is well explained by Hume, and seems admitted by Adam Smith, (B. 2. c.
2. 436, 441, 490.) But where a nation is in a full course of interchange
of wants and supplies with all others, the proportion of its medium
to its produce is no longer indifferent, (lb. 441.) To trade on equal
terms, the common measure of values should be as nearly as possible on
a par with that of its corresponding nations, whose medium is in a
sound state; that is to say, not in an accidental state of excess or
deficiency. Now, one of the great advantages of specie as a medium is,
that being of universal value, it will keep itself at a general level,
flowing out from where it is too high into parts where it is lower.
Whereas, if the medium be of local value only, as paper-money, if too
little, indeed, gold and silver will flow in to supply the deficiency;
but if too much, it accumulates, banishes the gold and silver not locked
up in vaults and hoards, and depreciates itself; that is to say, its
proportion to the annual produce of industry being raised, more of it
is required to represent any particular article of produce than in
the other countries. This is agreed by Smith (B. 2. c. 2. 437.), the
principal advocate for a paper circulation; but advocating it on the
sole condition that it be strictly regulated. He admits, nevertheless,
that ‘the commerce and industry of a country cannot be so secure when
suspended on the Daedalian wings of paper-money, as on the solid ground
of gold and silver; and that in time of war the insecurity is greatly
increased, and great confusion possible where the circulation is for the
greater part in paper.’(B. 2. c. 2. 484.) But in a country where loans
are uncertain, and a specie circulation the only sure resource for them,
the preference of that circulation assumes a far different degree of
importance, as is explained in my former letters.
The only advantage which Smith proposes by substituting paper in the
room of gold and silver money (B. 2. c. 2. 434.), is, ‘to replace an
expensive instrument with one much less costly, and sometimes equally
convenient’; that is to say, (page 437,) to allow the gold and silver
to be sent abroad and converted into foreign goods,’ and to substitute
paper as being a cheaper measure. But this makes no addition to the
stock or capital of the nation. The coin sent out was worth as much,
while in the country, as the goods imported and taking its place. It
is only, then, a change of form in a part of the national capital, from
that of gold and silver to other goods. He admits, too, that while a
part of the goods received in exchange for the coin exported, may be
materials, tools, and provisions for the employment of an additional
industry, a part also may be taken back in foreign wines, silks, &c.
to be consumed by idle people who produce nothing; and so far the
substitution promotes prodigality, increases expense and consumption,
without increasing production. So far also, then, it lessens the capital
of the nation. What may be the amount which the conversion of the part
exchanged for productive goods, may add to the former productive mass,
it is not easy to ascertain, because, as he says, (page 441,) ‘It is
impossible to determine what is the proportion which the circulating
money of any country bears to the whole value of the annual produce. It
has been computed by different authors, from a fifth* to a thirtieth of
that value.’
* The real cash or money necessary to carry on the
circulation and barter of a State, is nearly one third part
of all the annual rents of the proprietors of the said
State; that is, one ninth of the whole produce of the land.
Sir William Petty supposes one tenth part of the value of
the whole produce sufficient. Postlethwayt, _voce_, Cash.
In the United States it must be less than in any other part of the
commercial world; because the great mass of their inhabitants being
in responsible circumstances, the great mass of their exchanges in the
country is effected on credit, in their merchant’s ledger, who supplies
all their wants through the year, and at the end of it receives the
produce of their farms, or other articles of their industry. It is a
fact, that a farmer, with a revenue of ten thousand dollars a year, may
obtain all his supplies from his merchant, and liquidate them at the end
of the year, by the sale of his produce to him, without the intervention
of a single dollar of cash. This, then, is merely barter, and in this
way of barter a great portion of the annual produce of the United States
is exchanged without the intermediation of cash. We might safely,
then, state our medium at the minimum of one thirtieth. But what is
one thirtieth of the value of the annual produce of the industry of the
United States? Or what is the whole value of the annual produce of the
United States? An able writer and competent judge of the subject, in
1799, on as good grounds as probably could be taken, estimated it, on
the then population of four and a half millions of inhabitants, to
be thirty-seven and a half millions sterling, or one hundred and
sixty-eight and three fourths millions of dollars. See Cooper’s
Political Arithmetic, page 47. According to the same estimate, for our
present population it will be three hundred millions of dollars, one
thirtieth of which, Smith’s minimum, would be ten millions, and
one fifth, his maximum, would be sixty millions for the quantum of
circulation. But suppose, that, instead of our needing the least
circulating medium of any nation, from the circumstance before
mentioned, we should place ourselves in the middle term of the
calculation, to wit, at thirty-five millions. One fifth of this, at
the least, Smith thinks should be retained in specie, which would leave
twenty-eight millions of specie to be exported in exchange for other
commodities; and if fifteen millions of that should be returned in
productive goods, and not in articles of prodigality, that would be the
amount of capital which this operation would add to the existing mass.
But to what mass? Not that of the three hundred millions, which is only
its gross annual produce; but to that capital of which the three hundred
millions are but the annual produce. But this being gross, we may infer
from it the value of the capital by considering that the rent of lands
is generally fixed at one third of the gross produce, and is deemed its
nett profit, and twenty times that its fee simple value. The profits on
landed capital may, with accuracy enough for our purpose, be supposed
on a par with those of other capital. This would give us then for
the United States, a capital of two thousand millions, all in active
employment, and exclusive of unimproved lands lying in a great degree
dormant. Of this, fifteen millions would be the hundred and thirty-third
part. And it is for this petty addition to the capital of the nation,
this minimum of one dollar, added to one hundred and thirty-three and a
third, or three fourths per cent., that we are to give up our gold and
silver medium, its intrinsic solidity, its universal value, and its
saving powers in time of war, and to substitute for it paper, with all
its train of evils, moral, political, and physical, which I will not
pretend to enumerate.
There is another authority to which we may appeal for the proper
quantity of circulating medium for the United States. The old Congress,
when we were estimated at about two millions of people, on a long and
able discussion, June the 22nd, 1775, decided the sufficient quantity to
be two millions of dollars, which sum they then emitted.* According to
this, it should be eight millions, now that we are eight millions of
people. This differs little from Smith’s minimum of ten millions, and
strengthens our respect for that estimate.
* Within five months after this they were compelled, by the
necessities of the war, to abandon the idea of emitting only
an adequate circulation, and to make those necessities the
sole measure of their emissions.
There is, indeed, a convenience in paper; its easy transmission from one
place to another. But this may be mainly supplied by bills of exchange,
so as to prevent any great displacement of actual coin. Two places
trading together balance their dealings, for the most part, by their
mutual supplies, and the debtor individuals of either may, instead of
cash, remit the bills of those who are creditors in the same dealings;
or may obtain them through some third place with which both have
dealings. The cases would be rare where such bills could not be
obtained, either directly or circuitously, and too unimportant to the
nation to overweigh the train of evils flowing from paper circulation.
From eight to thirty-five millions then being our proper circulation,
and two hundred millions the actual one, the memorial proposes to issue
ninety millions more, because, it says, a great scarcity of money is
proved by the numerous applications for banks; to wit, New York for
eighteen millions, Pennsylvania ten millions, &c. The answer to this
shall be quoted, from Adam Smith (B. 2, c. 2, page 462), where speaking
of the complaints of the traders against the Scotch bankers, who had
already gone too far in their issues of paper, he says, ‘Those traders
and other undertakers having got so much assistance from banks, wished
to get still more. The banks, they seem to have thought, could extend
their credits to whatever sum might be wanted, without incurring any
other expense besides that of a few reams of paper. They complained
of the contracted views and dastardly spirit of the directors of those
banks, which did not, they said, extend their credits in proportion to
the extension of the trade of the country; meaning, no doubt, by the
extension of that trade, the extension of their own projects beyond what
they could carry on, either with their own capital, or with what they
had credit to borrow of private people in the usual way of bond or
mortgage. The banks, they seem to have thought, were in honor bound to
supply the deficiency, and to provide them with all the capital
which they wanted to trade with.’ And again (page 470): ‘When bankers
discovered that certain projectors were trading, not with any capital
of their own, but with that which they advanced them, they endeavored
to withdraw gradually, making every day greater and greater difficulties
about discounting. These difficulties alarmed and enraged in the highest
degree those projectors. Their own distress, of which this prudent and
necessary reserve of the banks was no doubt the immediate occasion, they
called the distress of the country; and this distress of the country,
they said, was altogether owing to the ignorance, pusillanimity, and bad
conduct of the banks, which did not give a sufficiently liberal aid to
the spirited undertakings of those who exerted themselves in order to
beautify, improve, and enrich the country. It was the duty of the banks,
they seemed to think, to lend for as long a time, and to as great an
extent, as they might wish to borrow.’ It is, probably, the good paper
of these projectors, which, the memorial says, the banks being unable to
discount, goes into the hands of brokers, who (knowing the risk of this
good paper) discount it at a much higher rate than legal interest, to
the great distress of the enterprising adventurers, who had rather try
trade on borrowed capital, than go to the plough or other laborious
calling. Smith again says, (page 478,) ‘That the industry of Scotland
languished for want of money to employ it, was the opinion of the famous
Mr. Law. By establishing a bank of a particular kind, which he seems to
have imagined might issue paper to the amount of the whole value of all
the lands in the country, he proposed to remedy this want of money. It
was afterwards adopted, with some variations, by the Duke of Orleans, at
that time Regent of France. The idea of the possibility of multiplying
paper to almost any extent, was the real foundation of what is called
the Mississippi scheme, the most extravagant project both of banking and
stockjobbing, that perhaps the world ever saw. The principles upon
which it was founded are explained by Mr. Law himself, in a discourse
concerning money and trade, which he published in Scotland when he first
proposed his project. The splendid but visionary ideas which are set
forth in that and some other works upon the same principles, still
continue to make an impression upon many people, and have perhaps,
in part, contributed to that excess of banking which has of late been
complained of both in Scotland and in other places.’ The Mississippi
scheme, it is well known, ended in France in the bankruptcy of the
public treasury, the crush of thousands and thousands of private
fortunes, and scenes of desolation and distress equal to those of an
invading army, burning and laying waste all before it.