William Gouge
An Inquiry


CHAPTER VI.
General Effects of this System.


The rise of prices that follows an expansion of Bank medium, and the fall that follows a contraction, do not affect all descriptions of labor and commodities, at the same time, in an equal degree.  The usual effect of an increase of issues, appears to be to raise still higher those articles which are rising from some natural cause; and the effect of a contraction, to sink still lower those which are falling from some natural cause.  As Malthus has observed, the tendency of paper money is in some instances to sink prices to their lowest point, and raise them in others to their highest.  The natural value no longer regulates exchanges.  We had melancholy proof of this effect of contraction in 1820, when, according to Mr. Niles' calculation, the average price of flour throughout the country was only two dollars and fifty cents a barrel.  Of rise of prices produced by expansions of Bank issues, we had striking examples in 1825 and 1831.

Wages appear to be among the last things that are raised by an increase of Bank medium.  The working man finds all the articles he uses in his family rising in price, while the money rate of his own wages remains unchanged.  In the year 1831, which was a year of great expansion, rents rose enormously in many parts of the town, store goods advanced in price, and such fresh provisions as are sold in the market were higher than they had been at any time since the resumption of specie payments; but the money rate of wages was hardly affected.7

If wages are not the first to fall on a contraction of issues, it is because the effects of the contraction fall unequally on different kinds of labor.  "Contractions" never proceed far, without breaking up some productive establishments.  Some men are thus deprived of employment: they enter into competition with the workmen in other establishments, and finally reduce wages in the branches of business not immediately affected by the contraction of Bank issues.

Hence the complaint we sometimes hear of "all branches of trade being overdone." A great number of enterprizes, undertaken with a cheering prospect of success when the Banks "make money plenty," come to an unfortunate conclusion when the Banks "make money scarce." As one man is thrown out of employment, his effective demand for the product of his neighbor's labor is diminished, and he, perhaps, becomes the competitor of his neighbor, instead of his customer.  The merchant is compelled to offer his services as a clerk.  The master mechanic becomes a journeyman.  If a clerk is thrown out of employment, the shoemaker has one good customer less.  If twenty clerks are deprived of employment, the shoemaker may find it necessary to dismiss one of his assistants.  If twenty shoemakers are without employment, the baker may find his sales of bread materially diminished: and so of all other trades.

If the real wants of the community, and not their ability to pay, be considered, it will not, perhaps, be found that any one useful trade or profession has too many members.  The number of educated physicians, for example, is not too great for the population.  But, not a few physicians remain without employment, while many persons, from inability to pay for medical advice, suffer all the evils of sickness.  It cannot be said that we have too many shoemakers, tailors, or cabinet-makers, while multitudes are but indifferently provided with clothing and furniture.  But, in one sense, "all businesses" may be said to be "over done," since all businesses are by this system rendered unprofitable to some who are engaged in them.

On the operations of manufacturers, these contractions and expansions are productive of most pernicious consequences.  Expansions of Bank medium are always incitements to them to extend their business.  The paper need not be put in circulation by direct loans to the manufacturers.  Lending it to such as will buy their commodities has the same effect.  Having, by the increase of Bank medium, been enabled to sell his goods at an advanced rate, the manufacturer re-commences operations with new spirit.  So facile is production with modern machinery, that a small rise of prices causes a great increase of cotton and woollen goods.  The production of the articles for which these fabrics are ultimately to be exchanged, cannot, unfortunately, be increased with equal facility.  Unfortunately, also, the Bank medium is soon contracted.  There is then a glut of manufactures, and a scarcity of money.

On the operations of the agriculturists, these expansions and contractions operate more slowly, but not less perniciously.  Of this we had a striking example in 1825, when the speculations in cotton (speculations which can be distinctly traced to an extension of the paper system in Europe and America,) caused much corn to be uprooted that cotton might be planted in its place.  The consequence was, a glut of cotton in the next year, and a scarcity of corn, in some districts of the South.

But, increase of Bank medium has the most obvious effect on real estate, as that varies most slowly in value from natural causes.  Whenever the Banks make money plenty, speculation in real estate is excited, because men are very desirous to possess that which will afford them a permanent revenue.  As the custom is to pay only part of the price agreed upon, and give mortgages for the remainder, a small increase of Bank issues produces a considerable rise in the price of immoveable property.  In Philadelphia and some other large towns, it is the practice with many not to give any money in the purchase of building lots, but to contract to pay a specified sum annually by way of ground rent.  Thus, when the currency is plentiful, men enter into obligations, binding themselves and their heirs to pay perpetual annuities; which annuities, when the currency becomes scarce, sweep away half or all their property.

A four story house on Market street, the erection of which cost $10,000 about the time of the last war, was offered for sale some years afterwards for five dollars.  No body would take it at this price, because the rent the house would bring was not equal to the ground rent.  A few fur longs higher up this street, several three story houses were bought for a dollar apiece; and the purchaser did not get for rent of houses and ground together, as much as he had, a few years previous, bargained to receive for the ground alone.

In the less commercial parts of the town, many mechanics took lots on ground rent, and invested their little savings in houses, which they hoped would be the property of themselves and of their children after them.  The Bank issues were contracted, and these hard-working men lost the net proceeds of many years of industry and economy.  Now, the owners of the ground meditated no injustice towards these mechanics.  When they fixed the rent of the lots, they supposed they were asking no more than they were worth in perpetuity;  and the mechanics supposed they were agreeing to pay no more than they were worth.  Their value was correctly estimated, but in a debased currency.  If the landlords had abated part of their demand, when a fall of prices took place through the enhancement of the currency, they would have acted on principles different from those which usually govern men of business.

For more than a century it had been the practice with men of limited means to lease lots on perpetual ground rent, erect houses thereon, and give mortgages for so much of the cost of building as they could not defray without borrowing.  There was little risk in entering into these obligations, as both the ground and the buildings rose in value with increase of capital and population.  In each succeeding year a portion of the debt was paid off, and the mechanic had, at the end of no long period, the satisfaction of calling his house his own.  The mechanics whose melancholy fate we have recorded, were acting on a method which had been successfully pursued from the first settlement of the country.  Their only misfortune was, being ignorant of the principles of currency, and having rulers as ignorant as themselves.

In all parts of the Union, except New England, property passed in the same manner from those who had an equitable to those who had only a legal claim to it.  Farms rose in price from fifty to a hundred per cent., and sunk again as rapidly as they had risen.  Thousands were reduced to poverty, and scores rose to wealth on the ruin of their neighbors.

It may be said that we are only describing the effects of a suspension and a resumption of specie payments.  To this it is sufficient to reply, that occasional suspensions of specie payments are necessary incidents of the Banking system.  Those who fancy that the Bank of the United States would be able to continue specie payments in time of war, forget the fate of the more powerful Bank of England.  Twice in the midst of profound peace, has this very Bank of the United States been on the verge of suspending specie payments; and the Bank of England itself was, in 1825, saved from bankruptcy, only by the intervention of a Sunday, the discovery in the cellar of the Banking-house of 800,000 one pound notes, by putting which in circulation again, the Bank evaded its promises to pay, and by an unexpected supply of gold from the continent.

Suspensions and resumptions of specie payments only make the effects of contraction and expansion more obvivious.  The money of the country is paper money now, as it was in 1815 and 1816.  Its "convertibility" fixes limits on its expansion; but frequent contractions are necessary to keep it "convertible," and these expansions and contractions are followed by very pernicious consequences.

As in the case of all public evils, the system bears with the most hardship on the poor.  The rate of wages is, as we have seen, the last thing that is affected by an expansion; and one necessary consequence of a contraction is, to deprive some men of employment.  If a rich man can not sell his merchandise to-day, he can sell it to morrow; and if he cannot sell it for full price, he can sell it for half price.  But labor is the poor man's only commodity.  If he cannot sell it to-day, it is lost to him forever.

The substantial capitalist is a frequent loser, though sometimes a gainer, by these fluctuations.  If his capital is small, and his credit in proportion, it is with difficulty he escapes from total ruin in times of contraction.  The reckless speculator, who has no capital of his own, but who operates extensively on the capital of other people, has much cause to be well pleased with this system.  If a loss is sustained by a fall of prices, the loss falls on his creditors, for he has nothing to lose.  If there is a gain, through a rise of prices, the gain is all his own.

If the speculator is a Bank Director, or a favorite with Bank Directors, happy is his lot.  Is there a scarcity of money ?  It affects not him.  Money is made more scarce with other men, that it may be plenty in his pockets.  Whatever may be the condition of others, he is enabled to meet his engagements, and to support his credit.  He has the means of purchasing the goods and real estate of distressed debtors at reduced prices, and of holding them till prices rise again.  A year seldom passes over without an opportunity of this kind occurring, and such opportunities sometimes occur several times in the course of a single year.

In the facility with which these speculators can obtain loans in troublous times, they have another source of profit.  In some seasons, they make more gain by discounting notes out of doors, at 2, 3, and 4 per cent. a month, than the Banks of a city acquire by their regular operations.  A "go-between" usually manages these transactions, and the speculator, though generally suspected, cannot be proved to be a usurer: but instances have been known of Directors following unsuccessful applicants for "renewals of accommodation" out of the Banking-house, and then discounting their notes for an extortionate premium.  In times of "expansion," men are invited to receive "accommodations" from the Banks; and in time of "contraction" these "accommodations" are made the instruments by which they are fleeced of their property.

Much is said against lotteries, and they are certainly great evils.  But a lottery, if there is no fraud on the part of the Managers, is perfect fairness when contrasted with some of our commercial operations.  Some must gain, and some must lose, in every lottery: but if it is fairly conducted, the chances of loss and gain are equal to all adventurers.  In the present great game of Banking, in which the fortunes of the whole community are the stakes, the very nature of the game gives great advantages to the Managers.

It is no reply to this to say, that many Bank Directors are too high-minded to make an improper use of their opportunities for making money.  Bank Directors are like other men – some of them good, some of them bad.  The great majority of them are worthy of all respect as private citizens: but even they must, if they are candid, admit that the system gives great advantages to some members of the community over others;  and it is of the system that we are treating.

Nor is this view of the subject altered by the fact that all the favorites of Banks do not become men of great wealth.  They have great advantages in the great game of society, but there is a bye-game among themselves, and one speculator wins from his fellow speculator what the latter had gained from the people at large.

Besides this, they are affected, in common with other men, by the various Banking processes which make business in general so uncertain as frequently to baffle all calculation.  These affect all classes of society.  These place us all astride of the see-saw of fortune.  Now we go up, and now we go down.  The fate of the frequenters of the Palais Royal is hardly more uncertain.

These vicissitudes of fortune are most striking in the cases of men of a bold turn of mind, who commence life without capital, and who, not satisfied with the gain acquired by a few years of successful speculation, continue their operations till fortune turns against them.  But the regular merchant, the plodding mechanic, and the pains-taking farmer, are not exempted from similar vicissitudes.  It is said, that, in one of the most commercial streets of Philadelphia, there were, a few years ago, but three or four mercantile houses of twenty years standing, which had not broken once or oftener, been compelled to ask for an extension of credit, or been in some way seriously embarrassed.  When we consider that the same causes are now in operation, how many of our present commercial houses may we hope will remain unembarrassed for twenty years to come ? No doubt many men will, in that period, retire from business, with handsome estates: but of such as shall continue operations for twenty years, how many will escape the vicissitudes which the present system of things entails on the community ?

We have become so accustomed to this system of breaking, that we begin to consider it a part of the system of nature.  But it was not so always.  Previous to the revolutionary war, there were but three bankruptcies among the large dealers in Philadelphia.*  A bankruptcy in the olden time, spread as much gloom over a family as a death;  and if the bankruptcy was the result of misfortune, the family had the sympathy of all their neighbors.

There is reason to believe, that in some periods of six months, more bankruptcies have been recorded in Philadelphia and New York, than in Hamburg and Bremen in twice that number of years: and that there are more insolvencies in the United States in one year, than happen in Holland in a whole century.

No natural causes exist to make trade more uncertain in the United States than in France, Germany, and Holland.  The commerce of those countries is, in fact, exposed to shocks, from which ours is exempt, from the operations of hostile armies in and near their territories, and from every change that happens in the political world immediately affecting their mercantile operations.  But the expansions of Bank medium lead our merchants to over-trading, and the contractions force them to make sacrifices of their property: and as these expansions and contractions are as incessant, though not as regular, as the ebbing and flowing of the sea, many kinds of business are with us rendered more uncertain by this one cause, than they are in some other countries by all natural and political causes put together.



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7   This is not the first time this remark has been made.  In the British Bullion Report, made in 1811, the following passage occurs: "The wages of common country labor, the rate of which, it is well known, itself of adapts more slowly to the changes which happen in the value money, than the price of any other species of labor or commodity."
      Hutchison, in his History of Massachusetts, vol. 2, page 401, makes a remark which shows that the effect of paper money is, in this respect, the same, whether it is issued by a Government or by a Bank.
      I recollect one advantage from paper money.  Upon the depreciation from time to time, the wages of seamen, and the rate at which coasting vessels and others were hired, did not immediately rise in proportion to the rise of silver, and exchange with London and other parts of the world,"

*   They were those of Scott and M'Michael, Peter Baynton & Co., and of one other firm, the name of which is not recollected by our informant.