William Gouge
An Inquiry

Is Paper Money Cheaper than Specie ?

The events of the last thirty years, have created a suspicion in most men's minds, that there is something not exactly right in our Banking system.  Indeed, the very head of the system, the President of the United States Bank, seems at times half a sceptic as to its utility.  He acknowledges that it is attended with great danger;  but then he says, "the substitution of credit for coin, enables the nation to make its exchanges with less coin, and of course saves the expense of that coin."

Mr. Gallatin, who is now President of the National Bank at New York, goes still farther.  "The substitution of a paper currency for the precious metals, does not," he says, "appear to be attended with any other substantial advantage than cheapness."

Bank notes, it must be confessed, come very cheap to those who issue them.  But to those who receive them, Bank notes come as dear as gold and silver.  The farmer must give as much of the product of his labor for a paper dollar, as for a silver dollar.

It is alleged by some, that "Bank notes increase the aggregate capital of the community, since they cause silver, which produces nothing, to be exchanged abroad for commodities useful in the arts, or for household consumption."

But it is not true that silver money produces nothing.  It is as productive as any other labor saving machine.  Its uses in commerce, are as great as those of the steam engine in manufactures.

Neither is it true, that the aggregate capital of the country is increased, when silver coin is displaced by Bank notes.  A mere exchange is made of one kind of capital for another.  The precious metals are exported, and laces, wines, silks, satins, and ostrich feathers, are received in return.  A nation that carries its consumption of foreign luxuries so far, as to leave itself without a suitable medium for domestic exchanges, may be compared to a mechanic who barters the tools of his trade for the enjoyments of the ale house.  Money is the tool of all trades.

But on the supposition most favorable to the friends of the Banking system, what sum is gained by the nation by the substitution of paper for specie ?

According to the calculation of Mr. Gallatin, the currency of the country consisted, on the 1st of January, 1830, of about ten millions of dollars in specie, in the hands of the people, of 54 millions of Bank notes, and 55 millions of Bank credits;  making a total of 109 millions of Bank medium, for the support of which the Banks keep 22 millions of specie dead in their vaults.

Now, supposing Bank medium to fall into disuse, these 22 millions of specie would be set free, and 87 millions more would be required to bring up our currency to its present amount.  What is this, when compared with the whole capital of the country, which is estimated by Mr. Lee of Boston, at ten thousand millions of dollars, and by two other able economists, at twelve thousand millions.  What is it, even when compared with the aggregate of incomes, which, according to Mr. Niles and Mr. E. Everett, is one thousand millions a year ?

It should be recollected, that, on the supposition of something being gained by the nation, by the use of paper money, the saving is once for all, and the annual gain is no more than the interest on the amount of medium.  Now, the interest on 87 millions, at six per cent., divided among the individuals who constitute our nation, is about 40 cents a piece !

Is it wise, for so trifling a gain, to derange all our monied operations ?

But if the inquiry be pushed further, it will be found that nothing is gained by the nation, (we do not say that nothing is gained by certain persons,) even on the supposition most favorable to the Banks.

For a specie medium, but one mint would be necessary.  To maintain paper medium, we have from 300 to 400 paper mints.  The expenses of these mints press heavily on the people.  The expenses of the Bank of the United States and its offices, are about 500,000 dollars a year.

According to Adam Smith, three million people, in the countries now forming the United States, were governed, and well governed, before the Revolution, at an expense not exceeding 350,000 dollars a year.

The labors of the American people for a few weeks would purchase them a sufficiency of metallic medium, which would not require renewal for a hundred years.  To support our paper medium, we are frequently obliged to purchase specie abroad, at a disadvantage.  As there is no profit on paper money, except by keeping down the amount of specie in the vaults of the Banks, the precious metals are frequently exported and sold at a loss.

The cheapness or dearness of an instrument, is to be estimated by the annual expense to which it puts us, in addition to its original cost, and by the manner in which it serves the uses intended.  Bank medium is a machine which requires continual watching, which is always getting out of order, which requires frequent and expensive repairs, and which, after all, performs its work badly.

Men have passed from one extreme to the other.  A hundred years ago, the chief feature in the commercial policy of nations, was the amassing of gold and silver, as a kind of wealth par excellence.  Now, he is the wisest statesman, who is most successful in driving the precious metals from a country.

In their attempts "to economize specie," as they call their absurd and nefarious policy, they seem to be forgetful of economy in every thing else.  Correct measures of value, it must be confessed, cost something.  So, likewise, do correct measures of weight and of capacity.  A metallic medium cannot be obtained without paying for it;  but whatever it may cost, it is well worth its cost.  Our roads and our canals, which are, like money, instruments for facilitating exchanges, cost immense sums.  So, also, do our ships, and our manufacturing machinery.

Among labor saving machines, gold and silver coin are entitled to the first place.  In no way can a nation invest a portion of its capital more profitably, than in a sound circulating medium.  It will return its original cost a hundred fold.  Without such a medium, it is impossible for contracts to be complied with in equity, or for productive industry to exert all its energies.

Of the Tax paid by the People to the Banks.

The thirty-one chartered Banks of Pennsylvania had, in November 1829, according to the statement of Mr. Gallatin, a nominal capital of $12,032,000.  One million three hundred and ten thousand dollars of this amount was invested in real estate, and 4,620,000 in stocks of various descriptions, leaving the Banks 6,102,000 to employ in discounting notes.[8]  From the $5,930,000, invested in stocks and real estate, it is to be presumed they derive as much advantage as private persons derive from similar investments.  With the remaining 6,102,000, they discount notes to the amount of 17,526,000.  On this amount they draw interest at 6.4-10 per cent., for the usage of the Banks is to charge 64 days' interest on loans for 63 days.

The revenue which private capitalists would derive from lending $6,102,000 at the legal rate of six per cent., would be $366,120 per annum.  The revenue which the Banks derive from the management of this amount, is 1,121,664 dollars.

If the Banks do not, by the use of a nominal capital of $6,102,000, draw interest from the people on the sum of 17,526,000 dollars, their returns to the Legislature are deceptive.  If they actually draw interest on this amount, they draw from the people $755,544 per annum more than would be drawn by private persons lending bona fide capital of the same amount as the nominal capital of the Banks.[9]

Supposing the sums paid in each year, since the passage of the Bank act of 1814, to equal that paid in 1829, the total amount paid by the people in sixteen years, over and above six per cent. on the loanable capital of the Banks, is $12,088,704.  A direct tax of half the amount for the support of government, would have produced a rebellion.

The Bank of the United States had, on the 1st of November, 1829, a nominal capital of $34,996,270.  Of this amount, $11,717,071 were invested in public stocks, and $8,876,404 in real estate, leaving it $19,402,795 of nominal capital for its proper business of accommodating borrowers and dealers in bills of exchange.  On this amount of bona fide capital lent at six per cent., private persons would draw a revenue of $1,164,167.  But the Bank, with this amount of nominal capital, discounts notes and bills of exchange, to the amount of 40,017,445 dollars, from which it derives an annual revenue of $2,561,114, or $1,396,947 more per annum than would be received by private capitalists.  In this estimate, we do not include what is paid to the Bank on the rate of exchange, though this must amount to hundreds of thousands of dollars.

Of the tax paid by the people for the support of the local Banks in other States than Pennsylvania, it is not so easy to form an estimate.  Mr. Gallatin gives a statement of 297 institutions having nominal capitals of the amount of 97,381,935 dollars, but he does not state what portion of their capital is invested in stocks and real estate.  The loans made by certain local Banks, out of Pennsylvania, having capitals of the amount of 81,363,224 dollars, he states to be 108,341,268;  but he gives no statement of the loans made on 20,412,711 dollars of nominal Bank capital.  Supposing the loans on this amount to be in the same proportion, the total amount loaned by the local Banks out of Pennsylvania, is 135,522,331 dollars, and the annual Bank interest on it 8,673,427 dollars.

Supposing these Banks to have the same proportion of their capital invested in stock and real estate, as the Banks of Pennsylvania, they have 49,387,015 dollars left for the business of discounting.  From such an amount of bona fide capital lent at six per cent., private persons would draw an interest of $2,963,220.  But the amount the Banks draw is, 8,673,427 dollars, or 5,710,207 more than would be drawn by private capitalists.

The sums, then, extracted from the people, over and above six per cent. on so much of the Bank capital as is employed in discounting, or the tax paid by the people for the support of the Banks, would appear to be--

For the support of the Banks of Pennsylvania, $ 755,544
do. local Banks of other States, 5,710,207
do. United States Bank, 1,396,947

We cannot pretend to be very exact in our estimate.  The local Banks in the other States, may have a greater proportion of their capital invested in stocks and real estate, than the Banks of Pennsylvania, or they may have a less proportion.  The total amount of their loans may be greater or may be less than has been calculated from the data furnished by Mr. Gallatin.  It is enough to know that the extra interest is millions per annum.

The principle on which this tax is levied, cannot be misunderstood.  With a loanable capital of 100,000 dollars, a Bank can, by the help of its deposits and circulation, make loans to the amount of 200,000 or 300,000.  Hence, for every hundred thousand of their own capital employed in discounting, the Banks draw twice or thrice as much interest as is drawn from the same amount in the hands of private capitalists.  The gain of the Banks from their practice of taking the discount in advance, and charging 64 days interest on notes which have but 63 days to run, is also considerable.


8   Some corrections might be made in Mr. Gallatin's estimates, but we take them as we find them, they being accurate enough for the illustration of principles, which is our only object in introducing them.
Algebraic signs would, if they were generally understood, serve the purposes of illustration as well as the most correct estimates.

9   It May, perhaps, be argued, that the "surplus funds" of the Banks ought to be added to their loanable capital.  But, as Mr. Gallatin has said, "it will easily be perceived, that what is called the surplus, and sometimes the reserved or contingent fund, is nothing more than that which balances the account, or the difference between the debits and credits of the Banks."  The surplus funds of the Banks of Pennsylvania were, in November, 1829, according to Mr. Gallatin's statement, $1,142,000.  If it be thought proper to add this amount to the loanable capital, the estimate of the tax paid by the people of Pennsylvania for the support of their local Banks should be reduced from 755,544 to 687,024 dollars per annum.  It is of little moment which mode of estimation is adopted.  Either proves that the tax amounts to hundreds of thousands of dollars in each year.