The substitution of a paper currency to the precious metals, does not appear to be attended with any other substantial advantage than its cheapness ; and the actual benefit may be calculated with tolerable accuracy. If in a country which wants and does possess a metallic currency of seventy millions of dollars, a paper currency to the same amount should be substituted, the seventy millions in gold and silver, being no longer wanted for that purpose, will be exported, and the returns may be converted into a productive capital, and add an equal amount to the wealth of the country. If the banking system, founded on the principle of a paper currency convertible at will into specie, should be adopted, and notes of a very low denomination be excluded, it will be found, that the circulation would consist of about sixty millions in bank notes and ten millions in silver.1 But in that case the banks, in order to sustain specie payments, must, on an average, have in their vaults about twenty millions in specie. This is believed to be nearly the state of things at this time in the United States, if, according to common usage, we consider bank notes as constituting the whole of the paper currency. There have been, therefore, on that principle, only forty millions of dollars saved and added to the productive capital of the country. This, at the rate of 5 per cent. a-year, may be considered as equal to an additional annual national profit of two millions of dollars. The substitution of bank notes to a metallic currency produces the same effect, as an addition of two millions a-year, to the exports of the United States, or as a diminution of taxes to the same amount. Being inclined to think that the credits on the books of the banks, called deposits in the United States, constitute to all intents and purposes a part of their currency, we believe that the benefit derived from the banking system is still greater, and is tantamount to an annual national saving, or additional profit, of near five millions of dollars.2 This is certainly an important advantage, provided the system is conducted so as to afford complete security ; and it would be altogether free of objection, if the banks were only banks of deposit and issued no paper. Barns are certainly a very expensive implement of agriculture. The capital expended on those buildings, in the middle and northern states, is more than the value of one years crop of the farms, and causes therefore a deduction of more than 5 per cent. on the annual gross produce of the earth. To dispense with barns would be a greater annual saving, than that which arises from the substitution of a paper to a metallic currency. Some favorable seasons occur, when the farmer might thresh his wheat on a temporary floor exposed to the weather, and dispense with a barn. Yet, in our climate, every prudent farmer prefers security to a precarious advantage, and would consider it a most wretched economy, not to incur the expense necessary for that object. Similar is the economy of that expensive instrument, the precious metals, if the substituted paper currency is insecure. To unite that security, which is derived from a uniform and permanent standard of value, with the acknowledged and considerable saving arising from the substitution, is the difficult problem to be solved, in every country that resorts to that cheaper species of circulating medium.
A paper currency is either convertible at will into specie, or redeemable at some future time, or altogether irredeemable. The two last descriptions are excluded by the Constitution of the United States, and require examination, only because experience has shown, that a currency of the first description may degenerate into one not convertible into specie, without, on that account, ceasing to be the only currency of the country. Some persons are yet found who contend for issues of paper money to an indefinite amount, without regard to the fundamental principle, that the demand is for value, and that it is impossible to increase the amount of currency beyond certain limits, without producing a corresponding depreciation in its value. A recurrence to that principle is sufficient to dissipate the singular illusion under which that opinion is advanced.
We find, in a paper laid before the Senate during their last session, that, according to the increase of population since the year 1820, there ought to have been, since that time, a demand for thirty-two millions of acres of the public lands, which, at the present price of 1¼ dollars per acre, would have yielded forty millions of dollars, (or four millions a-year,) whilst the annual sales amount only to one million, the reason for which is want of money to purchase. The remedy proposed in the sequel, is an issue of paper money by government, the general benefit of which, according to the writer, would be stupendous. Were our own government to increase our circulating medium only fifty millions of dollars, income-yielding property would rise two thousand millions of dollars.
The word money is used as synonymous with specie and currency. But as currency is the thing by which every thing else is valued, the value of every species of property is expressed in currency. A planter, possessed of property, which, in usual times, might be sold for one hundred thousand dollars, is accordingly said to be worth one hundred thousand dollars, though he may not, at any one time, have in his possession one thousand dollars in currency. The word money comes thus to be used as synonymous with wealth ; and, in that sense of the word, we agree with the respectable writer of the paper in question, that the reason why the sales of the public lands have not far exceeded one million of dollars a-year, has been the want of money, that is to say, of wealth on the part of those who would have wished to purchase. From the other writings of the same author, we had concluded, that he was in favor of issues of paper money almost to an indefinite amount. But it appears by this paper, that he is perfectly aware, that a very limited amount of currency is sufficient ; since he avers that an additional issue of fifty millions would produce, on the value of the productive property of the country, an effect forty times as great as that issue. This reduces the question to one of quantity, and whether the amount of currency supplied by the banking system now existing is insufficient, and ought to be increased by an issue of government paper. As it is the interest of the banks to issue as many notes as can be kept in circulation, and as they are authorized by their charters to issue more than three times the present amount, it is clear that the obligation to pay their notes in specie on demand is the sole reason why that amount is not greater. It is, therefore, absolutely necessary, in order to enlarge it, that the proposed new issue should consist of a government paper money, not convertible into specie on demand. It could not, according to the Constitution, be made a legal tender for the payment of debts between individuals, and might only be made receivable in payment of debts due to the United States. It is evident that such paper could not circulate a single day in competition with that of the banks, which is received not only for that purpose, but in payment of all debts, and is at all times convertible into specie. The new paper would be immediately depreciated in proportion to its amount, and produce no other effect than that of lessening the revenue of the United States in the same proportion. It would be much more simple, if that was the object, to reduce the rate of existing taxes ; with respect to the public lands, to reduce the price at which they are now sold. We believe that this last measure would be equally just and consistent with sound policy, and that the great change of circumstances which has taken place, and principally the superabundant supply of public lands, compared with the effective demand at the present price, imperatively require a reduction of that price. Those lands are the property of the people of the United States at large, and cannot be given gratuitously either to particular individuals or to particular states. But they should not be kept out of market by persevering in a price, that was adapted to the time when it was fixed, and no longer accords, either with the greatness of the supply, or with the wealth of the natural purchasers, of those who want them for their own use, and who may, if the expression is admissible, be considered as the consumers of that commodity.
But supposing, for the sake of argument, that this additional issue of paper by government should not experience any depreciation, and should circulate at the same rate, as bank notes convertible on demand into specie, not the slightest advantage would accrue to the purchaser of public lands, or to any other individual. If not depreciated, the same quantity of labor, of wheat, or of any other commodity, will be necessary, and must he given, in order to obtain an equal quantity either of that paper, of bank notes, or of specie. If depreciated and circulating, the farmer might indeed obtain two dollars of that paper, instead of one in specie, for a bushel of wheat, and the laborer receive one dollar nominal, instead of half a dollar in specie, for a days labor. But what benefit would arise to either ? Since the farmer would be obliged to pay also a double nominal price for the labor he wanted, and the laborer a similar double price for the farmers wheat, and since both would likewise be obliged to give a double price for any article they might want, when paid with that paper. This is so simple and obvious, that we are entirely unable to understand on what grounds the contrary doctrine can be sustained. After having tried to discover what was meant by those who pretend to argue in support of excessive issues of paper money, we have found nothing but a repetition of the erroneous assertions, on which the famous Law attempted to build the stupendous scheme which bears his name and desolated France in the year 1720. He asserted, 1st, that gold and silver were only the representative or sign of wealth ; 2d, that paper might be that sign as well as the precious metals ; 3d, that by doubling or trebling the amount of that sign, the national wealth would be increased to that amount ; 4th, that such increase of the currency would reduce the rate of interest, and thereby promote industry. It is hardly necessary to show that those assertions are a series of errors. The precious metals are not merely the sign or representative of wealth ; they have an intrinsic value, on account of the cost of their production, and of the demand for other uses than currency, and are therefore wealth itself. It is because they have as intrinsic and comparatively stable value, that they have become the standard of the value of every other commodity, or, according to Laws vocabulary, the representative or sign of wealth. A certain quantity of those signs is necessary for a circulating medium ; but the quantity used adds nothing more to the wealth of any country, than the intrinsic value of that quantity. Paper having no intrinsic value, never can, whatever its amount may be, add any thing directly to the national wealth. Its utility consists in the substitution of a sign of no value for a sign which has an intrinsic value, and which may, on that account, be used advantageously for other purposes than that of a sign. Having performed that office, the increase of paper, beyond the amount of the valuable sign of which it takes the place, neither adds nor produces any wealth. The multiplication of the signs, beyond the amount in value wanted, can have no other effect than that of depreciating their nominal value, and has none on the rate of interest, which depends, not on the amount of those signs, or of currency, but on the proportion between the amount or supply of capital which may be loaned, and the demand for that capital. The result of Laws scheme was a fatal illustration of his doctrines. By a series of arbitrary acts on the part of government, and by connecting some splendid and illusory schemes with the bank, he succeeded in putting in circulation about four hundred and twenty millions of dollars in bank notes, or more than twice the amount of the currency then wanted in France. This paper was made a legal tender, to the total exclusion of the precious metals. But the laws, and all the power of the French government, were unequal to the task of sustaining that excess of currency. The price of every species of merchandise naturally rose 100 per cent. Government, with a view probably to prevent a total catastrophe, reduced by a decree the notes to one half of their nominal value. The bubble burst instantaneously. The whole currency of the country, the four hundred and fifty millions dollars of bank notes, could not, the next day, have been sold for the value of the paper on which they were printed. They were subsequently funded at the rate of eighty for one. The public creditors, who had been paid in notes, lost one hundred and fifty millions of their capital. Some speculators in shares were enriched ; all the actual stockholders were ruined ; and the calamity extended to all the industrious and productive part of the community. Since that time banks have not been connected with such gross commercial bubbles. But in England, the South Sea scheme, and the joint stock companies of the year 1825, were erected on the model of the Mississippi Company of Law ; and the Assignats of the French revolution, as well as all the other attempts to substitute an excessive issue of pure paper money to a metallic currency, have been but copies of his bank notes.
It has been contended by distinguished writers of a very different description, that an irredeemable paper currency, not exceeding in its nominal amount that in value which is actually wanted, might be altogether substituted to gold and silver, provided that government should always regulate the issues so as never to exceed or fall short of that amount. The advantage of such paper, over notes convertible on demand in specie, would consist in saving the expense of the gold and silver necessary to pay such notes at the will of the holders, and in protecting the currency against both a panic, and the consequences of any great drain of the precious metals from abroad ; dangers to both of which notes payable in specie are exposed. It must, in the first place, be observed, that the unavoidable effect of an increased or diminished value of the currency, arising from contraction or excess of its amount beyond certain limits, is ultimately to sink or to raise the price of every other commodity. But this change may not affect immediately the price of the commodities or of the labor applied to objects not susceptible of being exported ; and that of exportable commodities is often affected by variations in the relative amount of supply and demand, which are altogether foreign to the state of the currency. The wisest government, with the purest views, never has any other means of ascertaining, whether the amount of a paper money is too limited or excessive, than the price of the precious metals in such paper, because those metals are, of all others, the commodity least liable to variations in its value. The rate of exchanges may occasionally be a more sensitive test, but is in reality a more circuitous and less certain mode of resorting to the same standard of value. Thus government has no means to ascertain, whether its issues are too contracted or too large, till after the evil has actually taken place ; whilst banks, obliged to pay their notes in specie, and skilfully directed, are constantly employed in preventing its occurrence. But supposing government to be endowed with such skill as to be able always to adjust the proper amount of currency ; an amount which, if this is metallic, adjusts itself, and which, by banks properly conducted, may be tolerably well regulated ; there is still an ingredient, inherent to paper not convertible on demand in specie, which no human skill can control. This is public opinion, with respect to future contingencies, and therefore purely conjectural.
It has been asserted, that the value of an irredeemable paper money is altogether regulated by its amount, and does not, or at least ought not, to depend on confidence in the solvency of the government by which it is issued. The last assertion may be strictly true, though we believe, that in point of fact, there has hardly been any issue of paper, which in its origin was not founded on an explicit or implied promise to redeem it. But, if not depending on confidence in the solvency, the value of the paper will most certainly be affected by the public confidence in the skill, discretion, and probity of government, these being the only guarantees against excessive issues, and experience having but too well proved the natural disposition of every government which ever did issue paper, to resort, whenever pressed by its exigencies, to that resource, without regard to amount and consequences. Our principal concern, however, is with paper, originally convertible on demand in specie, and which has degenerated into a paper, the redemption of which is in definitely postponed. It is evident that the value of such currency must depend, at least in part, on the probability of its being ever redeemed, or of specie payments being resumed, and of the time when this will take place. And as there lies the danger to which the currency of the United States is exposed, we will illustrate that position by some instances.
The paper money issued by Congress during the war of the American independence, experienced no sensible depreciation before the year 1776, and so long as the amount did not exceed nine millions of dollars. A paper currency, equal in value to that sum in gold or silver, could therefore be sustained so long as confidence was preserved. The issues were gradually increased during the ensuing years, and in April 1778, amounted to thirty millions. A depreciation was the natural consequence ; but had the value of the paper depended solely on its amount, the whole quantity in circulation would have still been equal in value to nine millions, and the depreciation should not have been more than 3 to 1 ; instead of which, it was then at the rate of six dollars in paper for one silver dollar, and the whole amount of the paper in circulation was worth only five millions in silver. It is obvious that the difference was due to lessened confidence. The capture of Burgoynes army was followed by the alliance with France and her becoming a party to the war against England. The result of the war was no longer considered as doubtful, and sanguine expectations were formed of its speedy termination. The paper accordingly rose in value ; and in June, 1778, although the issues had been increased to more than forty-five millions, the depreciation was at the rate of only four to one. From the end of April of that year, to the month of February, 1779, although the issues had been increased from thirty-five to one hundred and fifteen millions, the average value in silver of the whole amount of paper in circulation exceeded ten millions, and it was at one time nearly thirteen millions, or considerably more than that which could be sustained at the outset of the hostilities. But when it was discovered, that the war would be of longer continuance, confidence in the redemption of a paper money, daily increasing in amount, was again suddenly lessened. The depreciation increased from the rate of 6 to that of 30 to 1 in nine months. The average value in silver of the whole amount of paper in circulation from April to September 1779, was about six millions, and it sunk below five during the end of the year. The total amount of the paper was at that time two hundred millions ; and although no further issues took place, and a portion was absorbed by the loan offices and by taxes, the depreciation still increased, and was at the end of the year 1780 at the rate of 80 dollars in paper for 1 in silver. The value in silver of the paper currency, was then less than two millions and a half of dollars ; and when Congress, in March following, acknowledged the depreciation, and offered to exchange the old for new paper at the rate of 40 for one, the old sunk in one day to nothing, and the new shared the same fate.
The aggregate of bank notes of the Bank of England and country banks was nearly the same in the years 1810, 1813, and 1818, being, for each of those years respectively, about forty-six millions, forty-six millions two hundred thousand, and forty-six millions seven hundred thousand pounds sterling ; and the value in gold of the aggregate amount of notes was, for each of those years respectively, forty, thirty-five and a half, and forty-five and a half millions. A result nearly similar, will be found by comparing periods of years. The average amount of the notes in circulation was about forty-six millions for the years 1810, 1811 ; forty-five millions two hundred thousand for the years 1812 to 1816 ; and forty-four millions four hundred thousand for the years 1817 to 1819 ; and the average value in gold of those notes, for each of those periods respectively, was forty-one, thirty-six, and forty-three millions. It is obvious that those differences, in the respective value in gold of the whole amount of the currency, did not depend on its amount, but on the opinion entertained, either of the probable increase or contraction of the notes, or of the resumption of the specie payments. Had the depreciation of the notes depended solely on their excess, it would have been nearly the same in the years 1810, 1813, and 1818, when that amount was nearly the same. Reducing into gold the value of the whole currency, no other reason can be assigned but a greater or less degree of confidence, why a paper currency worth forty-five and a half millions could be sustained in 1818, whilst no greater value than thirty-five and a half millions circulated in 1813. It is indeed evident, that the confidence in the resumption of specie payments must have been greater in 1810, and much greater in 1818, than in 1813 ; and that, independent of the intrinsic value of the bank notes, as regulated by their amount, they must, whenever depreciated, acquire some additional value, according to the opinion entertained of their being again converted into specie, and of the proximity of that event.
A still more striking instance of the sudden alterations in value, to which notes not convertible into specie are liable, is to be found in that which took place in England, in the spring of 1815, on the landing of Bonaparte from the Island of Elba. The bank notes had gradually risen in value since the peace, and were not depreciated more than 12½ per cent. in the beginning of March. Towards the end of that month, and within less than a fortnight, the depreciation was 25 per cent., although there had been, during that time, neither additional issues of paper, nor exportation of the precious metals. We will quote only one more instance of a similar nature. During the general suspension of specie payments in the United States, the depreciation of the bank notes varied in the several sea-ports. Those of the Baltimore banks were at 20 per cent. discount in January 1815. The Treaty of Peace was ratified and published in the month of February ; and as the suspension of specie payments had not lasted six months, and was caused by the war, a general expectation immediately prevailed, that those payments would be forthwith resumed. Accordingly, bank notes rose everywhere in value, and, in March, the discount on those of Baltimore was only 5 per cent. As that expectation was disappointed, the notes again sunk in value, and, in July, those of Baltimore were again at a discount of 20 per cent. It is believed, that no doubt can remain, that a paper currency liable to fluctuations like those, and originating in causes that baffle all calculation, never can, by any skill whatever, be made a stable standard of value.
The paper currency of the United States is of a very different character, and, according to the general acceptation of that term, consists almost exclusively of bank notes payable on demand in specie. It may however be questioned, whether there are not other species of paper founded on credit, which ought to be considered as making part of the currency, and not merely as substitutes.
There are in England, where incorporated country banks, issuing paper, are as numerous, and have been attended with the same advantages and the same evils as our country banks, some extensive districts, highly industrious and prosperous, where no such bank does exist, and where that want is supplied by bills of exchange drawn on London. This is the case in Lancashire, which includes Liverpool and Manchester, and where such bills, drawn at ninety days after date, are indorsed by each successive holder, and circulate through numerous persons before they reach their ultimate destination, and are paid by the drawee. It has been contended that these substitutes for currency, and in one respect performing its office, must be considered as forming part of it ; and this assertion has been carried so far, as to insist that there was in England a circulation of one hundred and fifty millions of dollars in bills of exchange, which was of the same character. As this view of the subject would materially affect the result of any inquiry respecting currency, the question must be examined, and extended to private notes and to bank deposits.
It is difficult to distinguish a note on demand drawn by a private individual from a bank note, in countries where every individual is left at liberty to throw such notes in circulation as part of the currency. The discrimination has always been made on the Continent of Europe, where it is not believed that any paper of that description has ever been permitted to be issued by any person or company not specially authorized to that effect. We are not aware that any similar general restriction exists in Great Britain, or that others are to be found there, than the clause, in favor of the Bank of England, which forbids banking associations to consist of more than a limited number of partners, and the late laws forbidding, except in Scotland, the issue of notes under five pounds. The same liberty seems to have originally existed in the United States, but has subsequently been restrained by their several laws to incorporated banks. A solitary exception is to be found in Mr. Stephen Girards Bank, which was previously established, and which, from his great wealth, skilful caution, and personal character, is justly entitled to as much credit as any chartered bank in the United States. Congress has not, however, passed any law preventing the issue of notes by the corporation of the city of Washington, and there is still a small amount of paper in circulation, issued by the state of North Carolina. In every other respect, the currency of the United States, so far as it consists of notes, is strictly confined to bank notes issued by chartered companies.
A bill of exchange, drawn by an individual or individuals, who do not issue notes having the character of currency, appears to us to be clearly distinguishable from a bank note, though it is a substitute, and lessens the amount of currency which would otherwise be required. A payment made in bank notes is a discharge of the debt, the creditor having no further recourse against the person from whom he has received the notes, unless the bank had previously failed. The bill of exchange does not discharge the debt, the person who receives it having his recourse against the drawer and every preceding indorser, in case the drawee should fail or refuse to pay. But the essential distinction is, that the bills of exchange are only a promise to pay in currency, and that the failure of the drawers, drawers, and indorsers does not, in the slightest degree, affect the value of the currency itself, or impair that permanent standard of value by which the performance of all contracts is regulated. The case is, however, quite different, when the bills are drawn by a bank authorized to issue bank notes which make part of the currency. We perceive no difference between such drafts, particularly when paid at sight, and either post notes or ordinary notes. Five dollar drafts, drawn by the branches of the Bank of the United States on the bank, circulate at this moment in common with the usual five dollar notes. Similar drafts, varying in amount to suit the convenience of purchasers, are daily drawn by the bank on its offices, and by those offices on each other, or on the bank. Many of those drafts pass through several hands, and circulate several months, in distant parts of the country, before they are presented for payment. The holders of those bills have the same recourse against the bank, as the holders of bank notes. Those bills are of the same character, depend on the same security, and in case of failure would share the same fate with bank notes. Though not usually included in the amount of the circulation of the bank, we cannot but consider the average amount in actual circulation, as making part of the currency of the country. A question somewhat more difficult arises with respect to credits in account current on the books of the banks, commonly designated in the United States by the name of deposits, and which may perhaps be more easily solved by reducing it to its most simple form, that is to say, by first considering banks purely of deposit.
That of Hamburg, which still exists, is the most perfect of the kind. It neither issues bank notes, nor discounts notes or bills of exchange, but only receives silver in bars on deposit. For every bar containing a certain weight, called marc of Cologn, (equivalent to 3,608 grains troy weight,) of silver of a certain standard,3 the bank gives a credit on its books of 442 lubs Bco (27 marcs 10 lubs Bco) money of account. Any person having a credit on the books of the bank, may be paid in similar bars at the rate of 444 lubs Bco for a marc weight of Cologn of silver of the same standard. The difference, which is less than one-half per cent., defrays the expenses of the establishment. All the large payments are effected in Hamburg by checks on the bank, and by a corresponding transfer of the credit on its books from one individual to another. The utility of the establishment consists not only in the greater convenience and rapidity with which the payments are effected, but also in having substituted silver of an uniform standard, to a currency which consisted of German coins, varying in standard, weight, and denomination. The aggregate amount of credits on the books of the bank, being at all times precisely equal, at the rate above mentioned, to the quantity of silver in its vaults, it would be incomprehensible, and, indeed, absurd, to suppose, that such large capital, having an intrinsic value, should voluntarily be buried in the vaults, unless its representative, or the credits on the books of the bank, performed every office of currency. It is undeniable that this is the fact in every respect, every payment being effected by transfers of those credits, and their convertibility at any time into a determined weight of pure silver, affording the best possible standard of value. This indeed regulates exclusively the value of all the coins, whether in circulation for small payments, or brought to market as bullion.
Let it be supposed now, that it had been found from long experience, that the quantity of silver in the vaults, through all its fluctuations, had never been less than a certain sum, equivalent, for instance, to two millions of dollars. The directors of the establishment might conclude that this amount would, under no circumstances whatever, be withdrawn, or in other words, that this sum was the minimum of the currency wanted to effect the payments made in bank. They might therefore think themselves justifiable, in withdrawing that dormant capital from the vaults, and converting it into an active capital, by lending it to individuals. In this case, the amount of credits on the books of the bank would remain the same, as if that sum in silver had not been withdrawn from its vaults ; and all the payments effected by the transfers of those credits would continue to be made precisely as theretofore. The amount of those credits would therefore continue to be, in every respect, the currency of Hamburg, differing from what it was formerly, only in being sustained by a less amount in specie, and in depending, for its ultimate security, on the solidity of those to whom the silver withdrawn from the vaults had been loaned.
What we have stated as a supposititious case, actually took place in the Bank of Amsterdam, constituted on nearly the same principles as that of Hamburg ; and from which the directors secretly withdrew more than four millions of dollars, which they lent principally to the Province of Holland and to the City of Amsterdam. And it is, as is well known, what is always done openly and in perfect good faith by all our banks, as well as by the Bank of England and by that of France. The credits in account current or deposits of our banks are also, in their origin and effect, perfectly assimilated to bank notes. Any person depositing money in the bank, or having any demand whatever upon it, may at his option be paid in notes, or have the amount entered to his credit on the books of the bank. The bank notes and the deposits rest precisely on the same basis ; for immediate payment on the amount of specie in the vaults ; for ultimate security on the solidity of the debtors of the bank. In case of a run upon a bank, or of its failure, the security of the holders of notes is lessened in proportion to the amount of deposits due by the bank. We can in no respect whatever perceive the slightest difference between the two : and we cannot therefore but consider the aggregate amount of credits payable on demand, standing on the books of the several banks, as being part of the currency of the United States. This, it appears to us, embraces not only bank notes, but all demands upon banks payable at sight, and including their drafts and acceptances. But in order that such deposits, bills of exchange, or other paper founded on credit, should make part of the currency, it seems necessary, that they should constitute a demand upon banks that do issue currency, or that, as at Hamburg, a transfer of credit on the books of the bank should be a legal tender. If, in comparing the amount of currency in different countries, we have only included specie and actual issues of paper, it was partly in conformity with received usage, and partly from want of information respecting the amount, in other countries, of the bank credits, which may be considered as perfectly similar to our deposits.
Credit is essential to commerce : but whenever it receives a shock, a commercial revulsion and distress must necessarily ensue. This will always affect the currency to a certain extent, since there must be a greater demand for it, in proportion as the resources arising from credit are impaired. But where, as in the United States, the currency itself rests on credit, and the same institutions which issue that currency are those from which accommodations are expected, want of credit is most liable to be mistaken for a want of currency.
Although the causes of such distress, and of a real or presumed scarcity of currency, are of the same nature, they may, as somewhat dissimilar in their immediate effects, be distinguished as external or internal. As the imports and exports of a country are now but rarely effected by the same persons, there are always, in consequence of the commercial intercourse between two countries, creditors and debtors on both sides. It is obviously the interest of both to exchange or sell those debts, when the exporter does not want to import, nor the importer to export merchandise. A bill of exchange, drawn from the United States on England, is an obligation on the part of the drawer to exchange, for a sum paid to him in the United States, an equivalent in England. When the credits and debits respectively payable at the same time are nearly equal, the exchange is made on equal terms. In proportion as the debt of the United States to England is greater than that of England to the United States, the demand for bills on England will become greater than the supply ; and the drawer will obtain a greater sum in the United States, than that which by his bill he obliges himself to pay in England. Whenever the difference becomes so great, as to exceed the expense and risk of transporting precious metals to England, those metals will be exported in preference to a remittance in bills. When the commercial transactions between two countries are comparatively small, and the stock of gold and silver large, their exportation, particularly in neighboring countries, soon pays the balance and restores the equilibrium. When, as between the United States and England, the respective imports and exports are very large, the balance due may be increased in proportion ; and as the stock of the precious metals in the United States is comparatively small, the exchange may remain for years unfavorable, and the precious metals continue to be exported, until the balance is actually paid from the proceeds of the exports generally, or converted, by the sale of American stock, into a debt not immediately demandable. This apparently continued drain was considered, in former times, as an evil of great magnitude ; and severe laws were, in most countries, enacted against the exportation of specie. Experience has shown, not only that those laws were inefficient, but also that the best, if not only means, to insure a uniform and sufficient supply of any foreign product, when there is no other object in view, is to lay no restraint whatever on its importation and exportation. Commerce, when not interrupted by war, or other causes, is always found to supply the amount of precious metals which may be wanted. Numerous striking proofs might be adduced : it is sufficient to recollect, that the average rate of exchange on England, from the beginning of 1821 to the end of 1829, has been $4 87 cents per pound sterling, (about 93/5, per cent. premium on nominal par,) or 23/5 per cent. above the true par ; that it never was, during the whole of that time, below $4 60, at which rate, gold being underrated by our mint regulations, commences to be exported, and that that period was in no degree remarkable for scarcity of specie.
Being obliged to refer to the rate of exchange, it must be recollected, that what is universally meant by par, is the promise to pay, in another place, a quantity of pure silver or gold, equal in weight to the quantity of pure silver or gold contained in the coins, with which the drawer of the bill of exchange is paid. When bills are drawn at long dates, and payable at a distant place, the time which elapses between the purchase of the bill from the drawer, and its payment by the drawee, must be taken into consideration, in order to calculate what would be an equal exchange, as distinguished from the par of exchange. There is no other difficulty, but that of ascertaining their respective weights, in order to calculate the par of exchange between countries having the same standard of value, or in which payments are usually made with the same metal. This being the case in the United States and in France, and the French kilogramme being equivalent to about 15,435 grains, troy weight, the par of exchange of the United States on France, is at the rate of about 5 francs and 34½ centimes for a dollar, since the French franc contains 4½ grammes, and the United States dollar 371¼ grains of pure silver. Allowing 1¼ per cent. on account of the 90 days which will usually elapse between the day on which the value of a bill payable 60 days after sight is, in our country, paid to the drawer, and the day on which that bill is paid in the other country by the drawee, it will be found that the equal exchange between the United States and France is, on such bills, at the rate of francs 5,41 if drawn from the United States on France, and at the rate of francs 5,28 for one dollar, if drawn from France on the United States.
But if one of the two metals is, by mint regulations, underrated or excluded in one country, whilst the other metal is in the same manner excluded in another country, the usual payments will be made in different metals in those two countries ; and the par of exchange between them must, then, as is the case between the United States and England, depend on the relative value of gold and silver at the time, and vary with every fluctuation of that relative value. These fluctuations are, however, confined within narrow limits ; and the medium par of exchange between the United States and England, deduced from the average premium on gold over silver coins in France, is about $4 75, for one pound sterling, or near 7 per cent. above the nominal par assumed in the usual quotations of exchange. It is in those quotations supposed, that one pound sterling is equal to $4 44 4-9, or, in other words, that one dollar is equal to 4s. 6d. sterling. It is not necessary to investigate, whether this presumed equality or par was derived from the intrinsic value of some ancient Spanish dollar, no longer current, or whether it was adopted as convenient for the conversion of most of the currencies of the British colonies into British currency. It is certain that this imaginary par does not even correspond with that which, though erroneously, might be deduced from comparing separately the gold and silver coins of the two countries with each other respectively ; since this would be, if comparing gold to gold, about $4 56, and if comparing silver to silver, (at the former rate of 62 shillings sterling for one pound troy weight of silver, old British standard;) about $4 63 for a pound sterling. The dealers in exchange are at no loss to make their calculations, whatever rate may be assumed as par in the usual quotations : but this puzzles, and, in various respects, misleads those who, without investigation, naturally suppose that what has been assumed as such is the true par of exchange.
The causes of the fluctuations of exchange between distant places in an extensive country, or between different countries, are of the same nature, and may occasion a similar transportation of the precious metals from one place to another. We will hereafter examine how that from one part of the United States to another has been affected by the Bank of the United States. But there is this difference, between a commercial distress and presumed scarcity of currency, due to internal causes, whilst the foreign exchanges remain favorable, and a similar distress arising from large foreign debts, and accompanied by an unfavorable rate of exchange, that, in the last case, there is an exportation of the coins of the country which cannot take place in the first. If the same effects, in other respects, are nevertheless the same in both cases ; if in both, the same, and sometimes general distress equally prevails ; if the same difficulty occurs in the payment of debts ; if the same complaint is made of want of money, whether specie is exported or not, it is obvious that there must be another cause, besides an actual scarcity of currency, for the real distress which is felt ; and that what is called want of money, is not want of currency. It will be found that this cause is universally overtrading, and that the want of money, as it is called, is the want of exchangeable or saleable property or commodities, and the want of credit. The man who says that he wants money, could at all times obtain it, if he had either credit or saleable commodities.
Overtrading consists in undertakings or speculations of every possible description, which fail altogether, or of which the returns are slower than, under sanguine expectations, had been calculated, or the proceeds of which, (too many, tempted by temporary high prices or profits, having embarked in the same branch of business,) greatly exceed the demand, and glut the market. A great loss may be experienced by those who have entered into any such undertakings with their own resources. But when resting principally on credit, and pursued at the same time by a great portion of the dealers or men of enterprise, a general impossibility of fulfilling previous engagements takes place, which affects even those who are ultimately solvent. When that mutual confidence, which is the sole foundation of credit, is once shaken, the capitals that are usually loaned can no longer be obtained, the usual amount of bills of exchange, discounted notes, or other commercial papers founded on credit, is lessened, and specie or currency itself becomes comparatively scarce, partly because some is hoarded, principally because a portion of its substitutes is withdrawn from circulation. Yet specie, under those circumstances, acts but a subordinate part, its scarcity being the effect, and not the cause, of the evil, and the remedy to this consisting in restoring credit and confidence, which will always procure a sufficient amount of currency, and not in an attempt to increase the quantity of currency, which can produce no substantial benefit until confidence is restored. When it consists of paper founded on credit, any increase is inefficient for remedying the evil, unless it be issued by an institution, the credit of which has, in the general wreck, remained unaffected and unimpaired.
The commencement of the year 1793, was, in England, a season of great and universal commercial distress. It had, as usual, been preceded by a period of great apparent prosperity, which had stimulated overtrading ; and this had been followed by its unavoidable consequences. More than one hundred country banks failed, or suspended their payments ; the distress was general, the credit of solvent houses was affected, the usual accommodations, which enabled them to have their bills discounted, and to meet the demands against them, were withdrawn, and the complaint of want of money was universal. Under those circumstances, government interfered, and loaned, or offered to loan, to solvent dealers, five millions sterling in exchequer bills. The remedy was effectual ; the whole amount offered to be loaned was not even applied for ; and, in a very short time, confidence was restored, and every one who was not actually insolvent was able to meet his engagements. But exchequer bills are not currency, but only a promise to pay currency at the end of one year. Government did not lend currency, or add a single shilling to its amount. The credit of individuals had received a severe and general shock, and that of government, which was unimpaired, was substituted for private credit. Those who had capital to lend, and would not advance it on private security, or who, in other words, would not discount the bills of individuals, lent that capital, or the currency which was wanted, on public security, or, in other words, discounted the exchequer bills, that is to say, the bills of government. The distress, the pretended want of money, was relieved, not by any additional issues of currency, the amount of which must therefore have been sufficient, but by restoring private confidence and private credit.
It is also evident, that what was then effected by government, might have been done by the Bank of England, had that institution, more sparing of its resources, during the preceding period of prosperity and incautious enterprise, been enabled, when the revulsion took place, to lend its credit to solvent houses, by discounting their bills, and increasing its issues of paper currency. It may be presumed, that, having already overstrained its resources, the bank could not have done this, without endangering its own credit, and running the risk of being unable to pay its own notes, if their amount was increased. But the mode adopted by government, and which proved so efficacious, makes it obvious, that, had the bank been enabled, without the aid of the treasury, to relieve the distress, and, what was called the want of money, the relief afforded would have been the result, much less, if at all, of the enlarged issues of bank notes, than of the bank lending its credit to those solvent dealers whose credit was impaired.
As a bank cannot increase its discounts without increasing its circulation, the two operations, being in its hands inseparable, are generally confounded. The manner in which the British government afforded relief in the year 1793, conclusively proves that they are essentially distinct, even in a country where the currency consists principally of paper founded on credit, and that the demand always made on banks in times of pressure, for enlarged issues of bank notes, is not a demand for currency but for credit. Cautious and well-directed banks will always afford great relief in such times, if enabled by the previous prudent administration of their affairs to lend their credit to solvent dealers ; which cannot be done without enlarging their issues. If, on the contrary, this has already been done to its utmost extent, if during a period of high prices and great apparent prosperity, the spirit of enterprise, naturally excited by that state of things, and which required then to be checked, has, on the contrary, been stimulated by incautious loans and consequent issues of paper on the part of the banks, the result will be, and has everywhere always been, as fatal as unavoidable. When the revulsion takes place, when, from excessive competition or imprudent speculation, the market becomes glutted with a superabundance of any species of commodity, often in the United States of land itself, or when, from want of skill or any other cause, undertakings have altogether failed, or when the slow returns of such undertakings require years to be realized, and both capital and credit are exhausted ; at the very time when the aid of banks would be most wanted, those institutions, prematurely disabled, instead of simultaneously enlarging their issues, and lending their credit to solvent but embarrassed dealers, manufacturers, and farmers, are compelled in self defence to contract their issues and loans, and thus greatly to aggravate the evil, which they had at least neglected to check, if they were not instrumental in its growth.
In countries, therefore, the currency of which consists principally of bank paper, banks will have a beneficial or pernicious influence on credit, and on a currency depending on credit, according to the manner in which they may be administered ; useful when their operations, in prosperous times and whilst under their control, are regulated by probity, great discretion and skill, pernicious when their administration is defective in any of those respects. But in countries, where the currency consists wholly or principally of the precious metals, and where bankers lend money or discount bills, but do not issue a paper currency, the two operations are never confounded ; and although not exempt from commercial revulsions, these will be of less common occurrence, and have little or no influence on currency itself.4 It may be confidently affirmed, that the precious metals, under any circumstances whatever, and amidst all the temporary fluctuations arising from a disproportion between supply and demand, continue to be a more permanent standard of value than any other commodity, or any species of paper resting on an element so variable as credit.
We cannot conceal from ourselves, that specie-paying banks are not only exposed to extraordinary drains from abroad, but are also occasionally controlled by moral causes, the effects of which cannot be calculated, nor without great skill and discretion be always prevented. These never affect a metallic currency, which has an intrinsic value, varying less than that of any other commodity, and not at all depending, as paper, on confidence, fear, conjectures, or any of the fluctuations of public opinion. It is equally clear, that extraordinary drains of specie, occasionally inconvenient when the currency is purely or principally metallic, may be fatal to one which consists of bank notes convertible at will into specie. Supposing the currency of a country to consist of one hundred millions, a drain of twenty millions from abroad would produce great inconvenience, but not beyond that of contracting the metallic currency to that extent, until commerce had supplied the deficiency. But, if consisting of bank notes, sustained by twenty millions of specie in the vaults of the banks, the basis being withdrawn, the whole fabric is at once overthrown, and specie payments must be suspended.
One of the most fatal effects of that suspension is the great and unavoidable distress, which attends a return to a specie currency, particularly when the suspension has been of long continuance. Whilst this lasts, the loss falls on the creditors : but new contracts are daily made, founded on the existing state of the currency ; and should the suspension continue twenty years, as was the case in England, as almost all the contracts in force, and not yet executed, at the time when specie payments are resumed, must have been made when the currency was depreciated, the obligation to discharge them in specie is contrary to equity, fails on the debtors, who are always the part of the community less able to bear the burthen, and proves more calamitous than the suspension had been. Short in duration as this had been in the United States, the effect was sensibly felt : and to this cause, which also occasioned the failure of a number of new banks, must in a great degree be ascribed the general distress of the years 1818-1819. The relief laws of some of the States, and in England the corn laws, may be traced to the same source. In that country, after so long a suspension of specie payments, the calamity has necessarily been far more extensive and lasting. It is yet felt, and may still seek for remedies worse than the evil, and call for small notes, excessive issues, and all those measures which would necessarily lead again to an inconvertible paper money.
Considerations of this nature may well have suggested to the committee of the House of Representatives, the question, whether a metallic currency would not, in the United States, have been preferable to one consisting of bank notes. We would incline to the affirmative, if the system was not already established, and if we believed, that an attempt to return to a pure metallic currency, which could not, without producing great evils, be carried suddenly into effect, was at all practicable. Were not this the case, we would think, that a system of commercial credit, founded on deposits, bills of exchange, and other negotiable paper, such as is carried on by the bankers of London, and by all the bankers of the Continent of Europe, neither of whom issues any notes in the shape of currency, would afford to commerce, at least in commercial cities, nearly, if not altogether, the same accommodations and advantages which are found in the present system. Commercial revulsions, and numerous failures amongst dealers, as they may occur wherever there has been excessive overtrading, though less frequent, do nevertheless occasionally take place in countries which have only a metallic currency. But their effect is generally confined to the dealers, extending but indirectly and feebly to the community, and never affecting the currency, the standard of value, or the contracts between persons not concerned in the failures. It must be allowed at the same time, that, in the country, where the system of deposits cannot exist to the same extent as in cities, banks soberly and skilfully administered, stimulate industry by the facility which their loans afford to men of enterprise, and that the ability of those banks to make those advances, would be much curtailed, if altogether precluded from issuing notes.
A very ingenious plan was proposed by Mr. Ricardo, and has since been expounded and defended with great talent by Mr. MCulloch, intended to afford security against the dangers to which every system of paper currency heretofore devised is exposed. It is not applicable to the United States, as it is founded on the exclusion of gold and silver coins, which, by our Constitution, are alone a legal tender. Some plausible objections have been made to it, which, for that reason, it is not necessary to discuss ; and we will only give the outline of the plan.
It consists in the total exclusion of a metallic currency, with the exception perhaps of the silver necessary for small payments, in making the notes of the Bank of England a legal tender, and in imposing on that institution the obligation to pay them, on demand, in gold bars of the proper standard. This last provision would be sufficient to prevent any depreciation of the notes, whilst, on the other hand, the gold bars paid by the bank could not, either directly, or by being converted into coin, take their place and add any thing to the amount of the currency. Any call on the bank for gold, would therefore necessarily lessen that amount, and must also necessarily cease, whenever this was somewhat less than the amount in value, which is indispensable in England for the payments in currency. For whenever this point is reached, the notes must be worth at least as much as their nominal value in gold at its ordinary price ; and, in the case of unfavorable exchanges, the drain must altogether cease, as soon as the currency is sufficiently contracted to have raised its value to a rate corresponding with that of exchange. The inconvenience of that contraction would not, it seems, be greater than if the currency was purely metallic. Supposing forty millions sterling to be the minimum of the absolutely necessary currency under an unfavorable state of foreign exchanges, the community would be protected against the danger of any depreciation in the nominal value of the notes, and the bank, under any circumstances whatever, against a drain that could compel it to suspend its payments, provided the value of the gold bars in its vaults was always equal to the excess of its issues over forty millions. The plan was carried into effect, during a short period, by the Bank of England, and then discontinued, for reasons which have not been explained, and which it would be interesting to understand.
* It has been lately stated, that the bank notes of every description in England, amount to twenty-eight millions sterling ; and the bullion in the vaults of the bank, to thirteen millions. If this is correct, the capital saved is only fifteen millions, and the annual profit, derived from the paper currency, six hundred thousand pounds sterling.
2 We do not take into consideration the annual amount wanted to repair the loss occasioned by friction in gold and silver coins. This has been greatly overrated by respectable British writers, but according to the various opinions deduced from actual experiments, cannot exceed, taking the highest computation, and is probably less, than seventy thousand dollars a-year, on a coinage of forty millions.
3 Containing, according to most authorities, forty-seven parts pure silver, and one part of alloy.
4 See hereafter Mr. Barings evidence, and Mr. Tooke, respecting the effect of a metallic currency, in France.