William Gouge
An Inquiry

Of the Fiscal Concerns of the Union.

In a report to the Senate, by the Committee of Finance, made March 29th, 1830, it is said–

"The Government receives its revenue from–
343 Custom Houses,
42 Land Offices,
8400 Post Offices,
134 Receivers of Internal Revenue
37 Marshals,
33 Clerks of Courts.
"These, with other receiving officers which need not be specified, compose an aggregate of more than 9000 persons, dispersed through the whole of the Union, who collect the public revenue.  From these persons the Government has, for the ten years preceding the 1st of January, 1830, received $230,068,855.17.  This sum has been collected in every section of this widely extended country.  It has been disbursed at other points, many thousand miles distant from the places where it was collected;  and yet it has been so collected and distributed, without the loss, as far as the Committee can learn, of a single dollar."

The most difficult point in the business of finance, is to get possession of money.  If this point is attained, the safe keeping of the money, the transferring of it from one part of the country to another, and the paying it away, are easy undertakings.

If "not a dollar has been lost," it has not been because the present system contains any extraordinary guards against malversation.  The collectors at our custom houses have the whole amount of money received by them under their entire control, till it is, at stated times, transferred to the credit of the Treasury Department.  Under a different system, all the public officers at each particular point might be made checks on one another.

With a sub-treasury office in each State, the safe-keeping and disbursing of the public funds could be effected without any difficulty;  and the expense of each sub-treasury office need not exceed ten thousand dollars per annum.

If it were necessary occasionally to carry silver from one part of the country to another, the Government could do it as easily and cheaply as individuals.  The whole amount it would be necessary to transport, would not probably exceed four or five millions a year, nor the cost go beyond one per cent.  As the principal part of the United States' revenue is collected in those sections of the country which have usually the rate of exchange in their favor, what the Government would gain by the sale of bills of exchange in the West and South, on Boston, New York, Philadelphia, and Baltimore, would probably exceed what it would be forced to pay for the transportation of specie.

There is no novelty in this.  It is the system of all policed nations except our own.  In England, the Bank is merely auxiliary to the Exchequer and the Treasury.  The revenue collected at Liverpool, is, or was a few years since, remitted to London through the agency of a private Banker.

To incorporate a Bank with a capital of ten millions or of thirty-five millions, to endow that corporation with privileges which individuals do not possess, and to make its paper receivable in payment of dues to Government, is a measure so wide from the proposed end, that it cannot be considered "as necessary and proper," or, if the phrase be preferred, "as natural and appropriate."  It is difficult to believe that it would have been even so much as thought of, if the measure had not in itself been calculated to promote certain private interests.  The natural and appropriate way of keeping the public funds, is in the Treasury and in sub-treasury offices.  The natural and appropriate way of transferring them from point to point, is by bills of exchange, and the occasional transportation of specie.

Neither is the establishment of a United States paper money incorporated Bank, the "necessary and proper," or "natural and appropriate" way of correcting the evils occasioned by the State Banks.  A National Bank, resting on the same principles as the State Banks, must produce similar evils.  It must "contract" and "expand" as well as they.

If Congress should, from excessive caution, or some less commendable motive, delay the passage of the necessary laws for prohibiting the issue of Bank notes, the "necessary and proper" or "natural and appropriate" way of regulating the State Banks, would be by declaring that nothing but gold and silver should be received in payment of dues to the Government.  The State Banks would then be obliged to provide a sufficient fund of specie to meet the demands of the merchants having payments to make to Government.  This would force them to diminish the amount of notes in circulation.  The Government receiving and paying nothing but gold and silver, the people generally would begin to distinguish between paper and specie – between cash and credit.  Simple as the measure is, it would double the amount of metallic money in the country, and prevent, in a great degree, fluctuations of currency, and oscillations of credit, by taking away one of the chief causes of the instability of Bank medium.

The establishing of a paper-money incorporated Bank, is not the "necessary and proper" or "natural and appropriate" way of enabling Government to borrow when borrowing is advisable.  A Bank may, when instituted, lend to Government its whole capital, or so much, at least, as is not required for supporting its credit and circulation: but it is not often that it can, after it has been sometime in operation, make any great loan to Government, without either curtailing mercantile accommodations, or issuing an excess of paper.  Nearly all the great "expansions" and "contractions" that have occurred in both England and the United States, can be traced to attempts to convert Banks into fiscal machines.  If the operations of Government could be completely separated from those of the Banks, the system would be shorn of half its evils.  If Government would neither deposit the public funds in the Banks, nor borrow money from the Banks;  and if it would in no case either receive Bank notes or pay away Bank notes, the Banks would become mere commercial institutions, and their credit and their power be brought nearer to a level with those of private merchants.

The "necessary and proper" or "natural and appropriate" way of placing the financial concerns of the country on such a basis as will enable us to provide for all exigencies, is to make gold and silver coins the exclusive money of the country.  We shall then be prepared for either peace or war.

To depend on the Banks in time of war, after the experience of both England and the United States, would be the height of infatuation.  The impression produced on the minds of men by the suspension of specie payments, is so fresh, that, on a new declaration of war, it is probable great part of the deposits would be withdrawn.  If the Banks should escape this evil, the landing of a hostile force of but a few thousand men on any part of the coast, would create "a run" which would compel most of them to suspend payment.  If Government should, to forward its financial schemes, sanction or connive at a suspension of specie payments, it would be instrumental in producing such evils as we have suffered in past years.

A war imposes on Government the necessity of expending the greater portion of its revenues in a section of country distant from that in which it collects it.  The payment of the war taxes of a single year, would deprive great part of the Union of its specie.  The sources of foreign supply would be cut off, and much of the specie which flowed from the interior to the frontiers, would be exported.  It would not return in sufficient quantities, or sufficiently early to meet the wants of either the people or the Government.

A vigorous war of but two years continuance, in which our foreign commerce would be interrupted, must produce one of two results.  It must either compel the Banks to suspend specie payments, and thus produce evils which no pen can adequately describe;  or else force them to curtail mercantile accommodations, and thus spread ruin through the community.  To sustain the credit of Bank medium, it would be necessary to reduce it to one-third or one-fourth of its present amount: and as it would be impossible in a state of war, immediately to obtain a sufficient supply of gold and silver coin, the Government and the people would suffer all the evils of an insufficient circulating medium.

We have profited in some respects by the experience of the last war.  We have built ships, constructed fortifications, and collected military stores.  But "money is the sinews of war."  And it must be real money.  Paper money will not then answer.  It is not necessary that the real money should be in the coffers of Government.  It is enough that it is in the pockets of the people.

Let Bank notes be withdrawn, and such an accumulation of gold and silver coin will be made by individuals, that in no possible exigency will there be a real scarcity of money.  This is evident from the condition of certain countries in which paper money is unknown.  In Flanders, for example, every farmer has a little purse of gold or silver – small in proportion to his property, but making the aggregate throughout the country very considerable.  No thing is lost by this practice.  It is impossible to keep the whole wealth of a country in constant circulation.  If a man's whole stock consists of but two suits of clothes, he cannot wear them both at the same time.  It is of little moment, as regards individuals, whether their reserved stock be in money or in those things which money can procure.  In a national point of view nothing is lost by this custom.  It ensures the punctual performance of contracts.  No man has to call twice on a farmer in Flanders, for the payment of a debt.  Whatever may be the vicissitudes of war or of commerce, there is never in that country a scarcity of the tool of all trades.

We have that amount of metallic money in the United States which is barely sufficient, in the most favorable state of things, for daily exchanges, and which would not answer even in the most favorable state of things, if we had not various modes of barter, and different credit contrivances.  As much time is lost every year, in "dunning for debts," as would, if properly employed, purchase some millions of metallic medium.  Let the natural order of things be restored, and a sufficiency of metallic money will be collected, to enable the country to bear transitions from peace to war, and to answer all the demands of commerce, both ordinary and extraordinary.  As it is the custom of all prudent families in rural districts, to have on hand a greater quantity of flour and other necessaries, than is required for the use of the twenty-four hours, so it will become the custom for each prudent family to have a little money in reserve.  Out of this stock, the war taxes will be paid, and before the original stock is completely exhausted, a portion of it will come back to them in the regular course of trade.

Few people are more able than those of the United States to contribute what is necessary for the defence of their country.  Few people – if we had a proper money system, would be more willing.  Ask the farmer, if, in a war undertaken in a just and righteous cause, he would not be willing to contribute a certain number of bushels of wheat, to vindicate the honor of the nation or secure its safety.  Ask the shoemaker, if he would not be willing to contribute a certain number of pairs of shoes.  Ask the day laborer, if he would not be willing, in such a contingency, to labor a certain number of days on the fortifications.  Now, what a nation actually consumes in the course of a war, is labor and the products of labor: but the taxes cannot be conveniently collected in kind, and to collect them in money is impossible, for the people have it not to give.

Let those obstacles be removed which prevent our acquiring such a stock of metallic money as is adapted to varying exigencies, and in times of hostilities, neither productive industry nor commercial credit will be affected more than is necessary by the incidents of war.  In this condition of things, the Government could easily raise considerable sums by taxation.  If it chose to borrow, the negotiation of its loans would not, as in the last war, derange the whole train of mercantile operations.  Simply by collecting taxes enough to pay the annual interest, it could borrow to any desirable extent.  If the loanable capital of our own country were not sufficient to meet its wants, it would have the market of the world from which to supply the deficiency.

But, let the present system continue, and, in a state of war, the Government must get into financial embarrassments, in attempting to extricate itself from which it will, as in the last war, involve thousands in ruin.

Of Banking on Proper Principles.

There is nothing novel in the modern system of Banking, except its being carried on by corporations and by the instrumentality of paper money.

Private Bankers were known to the Greeks, the Romans and the Jews.  At Rome, especially, they appear to have been very numerous, and to have done an extensive business.  The shops round the Great Forum were chiefly occupied by them, and we may learn from Cicero and other ancient authors, that the Romans commonly paid money by their intervention.  A Roman would sometimes give an order, or, as we should say, draw a check on his Banker: but the usual way of managing pecuniary transactions, was by writing their names in the Banker's books.[1]

Previous to the establishment of the Bank of England, the goldsmiths of London performed most of the functions of Bankers.  To those who deposited money with them, they sometimes allowed six per cent. interest, but the usual rate did not exceed four per cent.

In Virginia, as is stated by a writer in the Richmond Enquirer, the merchants formerly acted as Bankers to the planters.  Governor Wolcot, in his Message to the Legislature of Connecticut, in May 1826, says that "private Banks existed in this country before and a short time subsequent to the Revolutionary War."

As a country advances in wealth and population, the business of dealing in money naturally becomes a distinct profession.  It is a business which requires no laws for its special encouragement: no charters to cause it to be conducted to the public advantage.  The trade in money is as simple in its nature as the trade in flour or the trade in tobacco, and ought to be conducted on the same principles.

Restore the natural order of things, by abolishing money corporations, and, in those parts of the country where there is little population, little wealth, and little commerce, there will be little Banking: while in those parts of the country where commerce is extensively carried on, Bankers will rise up in proportion to the wants of the community.

In most villages, all the call there is for Bankers could be answered by the Postmasters.  Offices of deposit, of transfer, and of loan, are not necessary in villages.  The only call there for a dealer in money, is to collect debts due to persons at a distance, and transmit the money to to whom it is due.  The publishers of periodicals now collect great part of what is owing to them on account of subscriptions through the medium of the Postmasters.  Many of the debts due to merchants might be conveniently collected in the same way, if Government were careful to appoint none but solvent and trust-worthy persons to be Postmasters: and if it should make a rule to remove them on proof being given of their having neglected to pay over money which they had collected.

But it would not be necessary for Government to go even this far, for us to have a good Banking system.  The Postmaster, in most small towns, would stand the best chance of becoming collector of debts for persons at a distance, and the commissions he would receive would, in many cases, exceed the amount paid to him as a public officer: but if he was found untrustworthy, or incapable, the business would be transferred to the storekeeper, or some other respectable inhabitant of the village.

In the larger towns, and even in the small towns which are centres of wealthy districts, the business of dealing in exchanges, and of acting as an agent between lenders and borrowers, would become a distinct profession.

In each city the number of Bankers would be in proportion to the amount of business to be done, and their capital in proportion to the trade of the city.  A merchant of Philadelphia who wished a note discounted, would, in stead of having his choice among a dozen corporations, have his choice among perhaps twice that number of private Bankers.  Instead of being obliged to approach the supercilious Director of some overgrown monied institution, he would deal with a private trader, to whom it would be of as much importance to lend as it would be to himself to borrow.  The extent of business these private Bankers would do, would depend, in a degree, on the disposition they showed to accommodate their customers.  The competition amongst them would be so lively, that, after the manner of the Bankers of Europe, they would allow a credit on deposits.  Being responsible in the whole amount of their private fortunes, they would seldom extend their loans so far as to cherish the wild spirit of speculation.  Their whole fortunes would be in the business, and their whole faculties exerted for its proper management, and it is in this way only that any business can be well conducted.

If there should be a necessity for placing any restrictions on these private Bankers, it would be simply that of restraining them from issuing notes, bills, or checks, which would circulate in the same way as the present Bank notes.  Some intelligent men who have turned their attention to the subject, think that even this would not be necessary.  They are of opinion that the competition among private Bankers would be so brisk, that they would effectually check one another.

In opposition to this it may be urged, that much has been lost by the breaking of private Bankers in England;  though it must be admitted, this is not a case exactly in point, since the private Bankers of England are influenced in their operations, though not regulated, by the great corporate institution of that kingdom.

In Scotland, where the private Banks have the predominance, little has been lost by the breaking of these institutions.  But, the evils produced by the occasional breaking of a Bank, are far from being the greatest evils of the system.  No instance has occurred of a Bank breaking in Philadelphia, and yet who can adequately describe all that the people of this city have endured from Banking.  We have satisfactory evidence that the Scotch Banks, by their "expansions" and "contractions," produce evils, the same in kind, though not in degree, as are felt in Philadelphia.

But in neither England nor Scotland, can we, perhaps, be said to have a fair example of private Banking, as the Government receives Bank notes in payment of taxes.  When the Government receives one kind of paper, the people lose their clear perception of the difference between cash and credit, and where room is made in this way for the circulation of paper, the most worthless kind sometimes obtains circulation as easily as the best.  "Numberless instances," says the Edinburg Review, "have occurred in the history of British banking, within the last few years, in which the notes of individuals without any real capital, and who were from the beginning in a state of insolvency, have continued to circulate for a long period in company with the notes of the best established houses, and to enjoy an equal degree of credit."

The private Bankers on the continent of Europe do not circulate any paper, but it is not in our power to say, whether this is, in all instances, owing to obstacles thrown in their way by Government, or to the indisposition of the people to receive paper where it is not taken in payment of taxes.

If notes issued by private Bankers should circulate as the notes of the present corporations, they would become money.  As a credit money, they would necessarily fluctuate in quantity.  It is not desirable that, in addition to changes in the state of credit, proceeding from great natural or political causes, we should have changes in the currency, to add to the uncertainty of trade.[2]

If these notes produced no other evil, they would prevent us from accumulating that stock of metallic money, which is required for the varying exigencies of peace and war.  After this had been for a time in circulation, the receiving of them would be, as in the case of the present Bank notes, a matter of necessity rather than of choice.

The evil would, indeed, in time, correct itself;  but if we can prevent it, why suffer it at all ?[3]

We can certainly carry the credit system far enough, by the agency of leger entries, notes of hand, bills of exchange, and bonds and mortgages.  We do not require the additional aid of credit money, to run us deeper in debt.

Why should a private Banker, having a capital of his own of five hundred thousand or a million dollars, and deriving therefrom an income of thirty thousand or of sixty thousand per annum, desire to double his income, by the circulation of paper money ?  He would make a legitimate use of his credit, in receiving money on deposit, at five per cent., and lending it again at six per cent.  More than this he ought not to desire.[4]

If the capital of a private Banker is small, he will derive as much profit from his credit as he is justly entitled to, in his commission on bills of exchange, and in the difference between the rate he will pay for money taken by him on deposit, and that at which he will lend this money to others.

The issue of notes by Bankers, for the convenient discharge of their own business, will not be necessary.  The private Bankers of London and Lancashire issue no notes.  At the clearing-house in London, in which their accounts are daily settled by an exchange of checks, transactions to the amount of four or five millions sterling are adjusted with the help of about two hundred thousand pounds in money.

If arrangements of this kind were not found to answer the desired end, a public Office of Transfer and Deposit might be established in each city, on the model of the Bank of Hamburg, with the exception of buying and selling bullion and dealing in exchange, which ought to be left to private Bankers.  The establishing of such an Office would be attended with a little expense, but if it would not be worth paying for, it would not be worth having.  If the Bankers objected to paying all the expense, the Government might, as such an office would be a safe and convenient depository of the public funds, share the expense with them.  There is nothing in the constitution to prevent the establishment of public Banks, which shall be mere Offices of Deposit and Transfer.  And as such Banks would be a great public benefit, the defraying of their necessary expenses out of the public revenue would not be objectionable.

In this way, we should secure all the advantages the present system affords, and avoid all its disadvantages.

We should have places of deposit safer than the present;  for the money deposited in a public Bank by one man would not be lent to another.

The business of settling accounts by transfers of credit, would be greatly facilitated.  One public Bank would suffice for each city, and the time which is now lost in running from Bank to Bank, would be saved.

The private Banks, paying interest on deposits, would extend throughout the country the advantages of Saving Banks.

Men who wished to borrow, would deal with a private Banker as an equal, instead of dealing, as at present, with an overgrown corporation, as a superior.

The business of dealing in exchange, would be better conducted than at present, for it would be left free to in dividuals, and they would show the same disposition to oblige and to give satisfaction, that is now evinced by the dry goods merchant, or the importer of groceries.

Instead of having to pay the expense of three or four hundred public Banks, we should have to pay the expense of only twenty or thirty, for this number of offices of deposit and transfer would suffice for the whole United States.

We should escape all the evils that flow from Banks as corporations, from fluctuations of the circulating medium, and from the false system of credit which has its origin in the present banking system.

And what should we lose ?  The supporters of the present system admit that "the only substantial advantage at tending paper money appears to be its cheapness."  Taking their own estimates of the amount of Bank notes and Bank credits, the sum thus gained does not amount to more than forty cents a year for each individual in the nation.  Is it worth while for so trifling a gain, (admitting it, by way of argument, to be again,) to endure all the evils evils of a bad system, and forego all the advantages of a good ?


1   "In foro, et de mensae scriptura, magis quam ex arca domoque, vel cista pecunia numerabatur." –Terrence.

2   "Hitherto," says Tooke, "the Legislature has restricted individuals, under the severest penalties, from establishing private mints, and uttering metallic money of intrinsic and discreditable value;  yet, with a degree of inconsistency which strikes us as most extraordinary the more attentively we consider it, our law-makers have permitted individuals to establish private Banks of circulation – and to utter paper money, possessed of only a conventional value, which a breath of panic may at any time destroy.  On the same principle that the Government protects the public against the probable insecurity which might arise from individuals being permitted to utter metallic currency, it should guard against the more probable, nay certain insecurity which is created when individuals utter a paper currency.  In every civilized country, supplying and regulating the circulating medium is a function of the sovereign prerogative.

3   What is here advanced is not at variance with the principles of Adam Smith, as will be seen by the following extract from his writings:
"To restrain private people, it may be said, from receiving in payment the promissory notes of a Banker for any sum, whether great or small, when they themselves are willing to receive them;  or, to restrain a Banker from issuing such notes, when all his neighbors are willing to accept them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe but to support.  Such regulations may, no doubt, be considered as in some respect a violation of natural liberty.  But those exertions of the natural liberty of a few in dividuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments: of the most free, as well as of the most despotical.  The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed."
      The proposal Adam Smith here supports, is that of prohibiting private Bankers from issuing notes of a less denomination than five pounds sterling, nearly twenty-five dollars Federal money.  On the principles on which he proposes to prohibit the issue of notes of some denominations, the issue of notes of all denominations may be prohibited.

4   "There is no more reason why a man, or body of men, should be permitted to demand of the public, interest for their reputation of being rich, than there would be in permitting a man to demand interest for the reputation of being wise, learned, or brave.  If a man is actually rich, it is enough for him to receive interest for his money, and rent for his land, without receiving interest for his credit also." –Raymond.