The Journal of Banking
by William M. Gouge,

Vol. I., No. 19,
Wednesday, March 16, 1842.

Origin of Paper Money.

It is a fact well worthy of notice, that in all countries into which paper money has been introduced, it has owed its origin, not to the demands of commerce, but to the necessities of the State.  The reason for this is, that commerce creates its own medium.  In commerce, conducted on legitimate principles, mere promises to pay are never substituted for actual payment.  The merchant may buy much on trust, but when the day arrives on which he has promised to pay, he will, if solvent and honest, fulfil his engagements.

The necessities of the State, in very ancient times, introduced paper money into China, into Tartary, into India, and into Persia.  And in modern, or comparatively modem times, the necessities of the State have introduced paper money into Italy, Spain, Portugal, France, Germany, Russia, Sweden, Denmark, Great Britain, the United States, Brazil, and Buenos Ayres.

There are some who suppose, or seem to suppose, that without paper money there would be little or no commerce.  We would call their attention to the fact, that in no one country did the necessities of commerce give rise to the use of paper money.  The fact is of importance.

The Bank of England was established on condition of lending all its capital to Government.  The first issue of paper money in this country was made by Massachusetts in 1690, not to serve the purposes of commerce, but to satisfy the demands of some clamorous soldiers.  The next was made by South Carolina in 1712, to defray the expenses of an expedition against the Tuscaroras.  The first of our regularly constituted paper money banks was the Bank of North America.  Private scheming was undoubtedly at the bottom of this, but the schemers owed their success entirely to the hopes they held out of relieving by their new institution the pecuniary wants of Government.  The like is true of the first Bank of the United States.

Banks have, indeed, been established in different countries, solely to aid the operations of commerce.  Of this kind were the banks of Hamburg and Amsterdam.  But they were hard money banks.

Paper Money Reform.

In no country into which paper money has been introduced, has the system been reformed.  In all, the enormity has gone on increasing, till it has exploded.  It was thus with the paper money of China, thus with that issued by Law in France, thus with the assignats, thus with our provincial paper money, thus with our continental money.  And thus, we suppose, it must be with the present paper money systems of Great Britain and the United States.

In Austria, France, Portugal, Sweden, Denmark, and perhaps in other countries, as well as Great Britain and the United States, instances have occurred of banks' suspending specie payments and afterwards resuming them.  But this is, at best, but a partial reform.  Banks in which the co-partners are exempted from personal responsibility, are chartered monopolies of the most odious description.  And whether such banks pay, or refuse to pay, specie on demand, their paper never can adequately perform the chief function of money.  It may be very convenient as a commercial medium;  but as a measure of value it is one of the most deceptive that can possibly be imagined.

Banking History.

Mr. Randolph opposed the establishment of the United States Bank on the ground that "it would prove a crutch, and, as far as he understood it, a broken one.  It would tend instead of remedying the evil to aggravate it."  Mr. Jeremiah Mason thought "the remedy proposed was something like Sangrado's practice;  more bank paper of the came sort --more hot water for the same evil."  Mr. Wells thought "the scheme of policy about as wise, in point of precaution, as the contrivance of one of Rabelais' heroes, who hid himself in the water for fear of the rain.  The disease under which the people labor, is the banking fever of the States;  and this is to be cured by giving them the banking fever of the United States."

That these gentlemen were correct in predicting that the establishment of the United States Bank would only increase the evils it was intended to cure, abundant, evidence will be found in the history of the early operations of the Bank, and of the effects thereby produced, as recorded in the latter part of this number, pages 297-304.  The immediate operations are related by Mr. Cheves, the predecessor of Mr. Biddle, in the Presidency of the Bank.  The effects they produced, by other gentlemen who were eye witnesses of these effects.

Much praise has been bestowed on Mr. Cheves for his management of the Bank: and great praise is undoubtedly due to him for not using his power to promote any speculations of himself or his friends.  He looked solely to the interests of the Bank.  Yet, such is the nature of the system, that it is a question whether it did not, while under the control of Mr. Cheves, do quire as much harm as when under the control of Mr. Biddle.  Mr. Cheves, by his course of policy, saved the Bank, but thereby ruined the people.  We know not where, than in the effects of his administration, stronger evidence is to be found of the truth of the declaration of Lord Liverpool, that paper money banks sustain specie payments through means which cause "the downfall of thousands and hundreds of thousands, and the convulsion of all kinds of property.  It is true that the evil carries its own cure;  but, with such terrible consequences, that the cure is worse than the evil."

The Standard of Value.

Lord Stanhope laid it down as a principle, "that a pound sterling being the abstract value by which the computed value of any object of consumption is measured, that value ought to be independent of the computed value of the variable quantities of gold and silver, the representative signs of which may be found in circulation."

Absurd as it may seem to make an abstract idea the standard of value, we are inclined to think that the absurdity is less in the opinion expressed, than in the thing itself, and that such is really the standard in all paper money countries, whether the banks pay specie, or do not pay specie.  In other words, we incline to the opinion that in all such countries, the standard of value is that ideally, that intangible something, that mental abstraction, the bank dollar, or the bank pound, of which the bank note is the sensible representative, and that gold and silver coins are, in such countries, mere merchandize, or at best but a subsidiary currency.  As any man can conceive of a money of account, and a money of circulation, bearing the same name, and yet distinct from one another, what hinders his forming an equally distinct conception of a standard of value wholly ideal, and yet bearing the same name as a tangible, ponderable, gold or silver coin.

Value is, according to some approved writers, in its ultimate analysis, "a judgment of the mind."  It would carry to too far into the regions of metaphysics, to show how they make this out.  If they are correct in their views, why should we not have an ideal as well as a sensible standard of value ?

The standard of value is, in point of fact, that which determines prices.  This, in all paper money countries, is, so far at least as respects wholesale transactions, bank medium: for it is in that that payments are effected.  This bank medium has a certain relationship to gold and silver;  but it does not thence follow that gold and silver, and not bank medium, is the standard of value.

Perhaps the question will be propounded, "if bank medium is the practical standard of value, how comes it that gold and silver coins, of the same denominations as the bank medium, never vary in price, so long as the banks pay specie ?"  We shall answer this question by asking another.  How comes it, that since the time of commencing this Journal, there have been, according to the New York and Philadelphia Prices Current, no variations in the prices of certain kinds of iron ?  Nay, how comes it that we have had but once, and that but lately, to alter the quotations of any species of tobacco ?

If with such a currency as that of Philadelphia, always varying in amount, and with domestic and foreign exchanges continually fluctuating, the prices of iron, and, above all, of tobacco, can remain unchanged for months in succession, there is no difficulty in conceiving why sovereigns may bear one price for years together, and yet bank medium, and not gold, be the practical standard of value in Great Britain.

Metallic money may circulate to a certain extent, and yet not be the standard of value.  Its value as currency may exactly correspond with that of the like denominations of paper money, or fractional divisions of the same, and yet the metal composing this money may bear either a higher or lower price in the bullion market.  The copper in each of our cents is worth less than the one-hundreth part of a dollar;  yet these cents are made to circulate as worth exactly one-hundreth part of a dollar, by the care of the officers of the Mint to issue no more than are absolutely necessary to supply the demand for this kind of circulating medium.  The silver in an English shilling is not worth the twentieth part of a pound sterling: yet it circulates at this rate, because no more shillings are issued than are required for small change.

In Philadelphia, at the present moment, exactly the opposite state of things prevail.  Our petty currency consists of silver coin, which for months past has borne a premium in the brokers' shops.  Yet so long as the premium did not rise above five or six per cent., it was given freely in 'change of "Relief notes," which were our practical standard in retail trade.

These facts show that metallic money may circulate to a certain extent, though the metal composing it may be of greater or less value as currency than as bullion.  But in such cases metallic money is not the standard of value, but merely a subsidiary currency.  And such, we conceive, at the present moment, are dollars and half dollars in New York and New England;  and golden sovereigns in Great Britain.  The practical standard of value in New England is that impalpable thing, the bank dollar, and in Old England, that intangible something, the bank pound.

"The paper of the Bank of England," says Dr. Bollman, "preserves a value, as steady perhaps as any attainable, whilst the precious metals, like other commodities, fluctuate round this standard."

The Doctor said this in 1816, after the Bank of England had been in a state of suspension for eighteen or nineteen years, and four or five years before it resumed specie payments.  Other writers of that day went so far as to assert that, "of all commodities, gold and silver fluctuated most in value."

There is more of truth in some of the views of the Anti-Bullionists, than some of their opponents have been willing to admit.  Their system as a whole is an absurdity;  but the absurdity consists, not in declaring that bank notes are, in paper money countries, the practical standard of value, but in maintaining that they ought to be.

It is a fact that, when the banks suspend specie payments, few things fluctuate so much in their paper money price, as gold and silver.  And it is a fact that, so long as the banks pay specie, gold and silver remain steadily of one price, as estimated in paper money.  But in neither case, as we conceive, are gold and silver what they ought to be, namely, the standard of value.  They are made to be mere commodities;  or, at best, a subsidiary currency.

Few doctrines are more pernicious than that which teaches that, so long as the banks pay specie, we have sound standards of value, and sound measures of value.  The banks do then, indeed, keep two commodities, gold and silver, at fixed rates, as compared with paper, but they cause all others to fluctuate to a most ruinous extent.  We doubt if the fluctuations in the prices of commodities generally, are not quite as great when the banks pay specie, as when they suspend.  If the tables we have published of the prices of commodities at New York and Philadelphia be examined, it will be found that fluctuations in the one city have been quite as great as those in the other.

Our currency, in the best of times, cannot be said to be even founded on specie, though, in such times, it is possible to get specie for it freely, to a certain extent.  It is founded on cotton, or rather on the whole amount of our exportable commodities, added to the whole amount of our credit in foreign countries.  Just in proportion as the sum for which the total of our exports sells abroad, increases in amount, and just in proportion as we can, in addition thereto, run in debt abroad by sales of stocks, and by other contrivances, are our banks able to expand.  For, then there is little or no demand for specie to pay foreign balances.  Just in proportion, on the contrary, as the sum for which the total of our exports sells abroad, diminishes, end just in proportion as our credit abroad declines, are our banks compelled to contract.  For, then there is a great demand for specie to pay foreign balances.

The currency of England rests on precisely similar principles;  and as our principal sales are made there, and our principal credits are obtained there, every shock she feels, is felt in return by us.

Such is the wretched standard of value we have obtained by substituting bank medium for gold and silver money.  It is a standard which is never the same for two years in succession, for in no two years together do our exports end imports bear the same relationships to one another, or does our credit in foreign countries remain unaltered.  Instead of our money regulating our commerce and our credit, our commerce and our credit regulate our money.  We exactly reverse the natural order of things.  Our standard of value is bank credit, a something which we do not say is entirely without value, but which is of a very uncertain, and very fluctuating value.  As a branch of commercial credit, it is affected by every political event that occurs.  Nay, by every wind that blows.  A woollen thread, or a piece of India Rubber, would be quite as good a standard of length.

Finances of the United States.

The Secretary of the Treasury has informed Congress that the demands on the Treasury, will, in the months of March, April, and May, exceed the means of the Treasury, in the amount of three million dollars.  To meet the deficit, he proposes a fresh issue of Treasury notes.

A gentleman who has recently been at Washington, has addressed us a note, in which he says, "Government will fail in its credit.  It cannot borrow till it has a revenue that will pay ordinary expenses, interest on the existing debt, and leave a surplus of two millions to discharge part of the principal.  Till it has such a revenue, it cannot borrow in Europe, nor here, at any rate, for six months to come.  I fear that, to avoid the unpopularity of taxing, Treasury notes will be issued to such an excess, that they will depreciate greatly in value, or that fiscal notes will be issued to serve as a currency, on the principle of the Assignats, or the old Continental Money.  The country will submit to any plan for making money plenty."

We seem to be rapidly hastening back to the condition in which we were before the adoption of the Federal Constitution, and all owing to the violation of some of the plainest provisions of that Constitution.

Robert Morris.

This gentleman was, as our readers know, the father of paper money banking in the United States.  The following notice of him we extract from the Travels of the Marquis de Chastellux, a French officer, who was in this country during the latter part of the revolutionary war.

"I hurried to make acquaintance with Mr. Morris.  He is a very rich merchant, and consequently a man of every country, for commerce bears every where the same character.  Under monarchies it is free: it is an egotist in republics: a stranger, or, if you will, a citizen of the universe, it excludes alike the virtues and prejudices that stand in the way of its interests.  It is scarcely to be credited, that amongst the disasters of America, Mr. Morris, the inhabitant of a town just emancipated from the hands of the English, should possess, a fortune of eight millions, (i.e. of livres, equal to one million and a half of dollars.)  It is, however, in the most critical times that great fortunes are acquired.  The fortunate return of several ships, the still more successful cruises of his privateers, have increased his riches beyond his expectations, if not beyond his wishes.  He is, in fact, so accustomed to the success of his privateers, that when he is observed on a Sunday to be more serious than usual, the conclusion is, that no prize has arrived in the preceding week."

To this account, the translator adds the following, by way of note.

"Mr. Morris has certainly enriched himself greatly by the war;  but the house of Willing & Morris did a great business, and was well known in all the considerable trading towns of Europe, previous to that period.  Mr. Morris had various other ways of acquiring wealth besides privateering;  amongst others, by his own interest, and his connections with Mr. Holker, then Consul General of France.  At Philadelphia, he frequently obtained exclusive permission to ship cargoes of flour, &c., in the time of general embargoes, by which he gained immense profits.  His situation gave him many similar opportunities;  of which his capital, his credit, and his abilities always enabled him to take advantage.  On the strength of his office as Financier General, he circulated his own notes of Robert Morris, as cash, throughout the continent, and even had the address to get some assemblies, that of Virginia, in particular, to pass acts to make them current in payment of taxes.  What purchases of tobacco, what profits of any kind, might not a man of Mr. Morris's abilities make, with such powerful advantages ?"

Legal Decision.

Some time ago a case was brought before the Court of Common Pleas, of Dauphin County, Pennsylvania, after a hearing of which, the Judge decided "that a payment in current bank notes discharged a debt, even though the bank had previously failed, provided both parties were ignorant of the fact."

The case was recently taken to the Supreme Court, and there the decision of the Court below, was unanimously confirmed by the Judges.  The Chief Justice remarked, that, by the conventional rules of business, a transfer of bank notes was regulated by different principles from a transfer of other promissory notes.  "They are lent," said he, "by the banks as cash;"  they are paid away as cash;  and the language of Lord Mansfield was not too strong when he said, "they are not goods, nor securities, nor documents for debts: but are treated as money, as cash, in the ordinary course and transaction of business, by the general consent of mankind, which gives them the credit and currency of money to all intents and purposes.  They are as much money as guineas themselves are, or any other coin that is used in common payments as money or cash."

The Chief Justice admitted, in the fullest manner, the right of any man to decline receiving bank notes in payment for a debt, and to ask payment in coin.  "But," says he, "where the party has accepted, without reserve, what the conventional laws of the country declare to be cash, his claims to any thing further is at end.  The creditor agrees to take the risk of the banks' solvency when he makes its notes his own, and accepts them as cash, without any qualification."

This decision of the Supreme Court of Pennsylvania, is in exact accordance with the doctrines we have always proclaimed, namely, that bank notes are, to all practical intents and purposes, the money of the country.  They are what determine prices.  They are what discharge debts.  They are, however, a false and deceptive money.  They cannot adequately measure values, except when the commencement and the conclusion of enterprizes are brought very close together.

If bank notes were, what some suppose them to be, mere commercial medium, mere substitutes for money, the use of them would not be objectionable.  But they have this character only when they are for large amounts, and take the place which would otherwise be filled by bills of exchange.  When they are of such small amounts as to form a part of what is called "the consumptive circulation," they become money;  but money of such a character as deceives every man who enters into contracts on time, or engages in enterprises which it requires a long time to bring to completion.

The intention of the framers of the Constitution was that this should be a hard money country.  But this intention has been completely frustrated by the establishment of paper money banks.


The following lines by Alexander Pope, might serve as a model for a poem which might extend to some hundred verses.

Blest paper credit, last and best supply,
That lends corruption lighter wings to fly;
Gold, imp'd by thee, can compass hardest things,
Can pocket States, can fetch or carry Kings.
A single leaf shall waft an army o'er,
Or ship off Senates to a distant shore.
A leaf, like Sybil's, scatter to and fro,
Our fates and fortunes as the winds shall blow;
Pregnant with thousands flits the scrap unseen,
And silent sells a King, or buys a Queen.

Houses to Let.

Any country gentleman who wishes to remove into a city, can be very conveniently accommodated just now in Philadelphia, provided only he can compass the means.  First of all, we have "for sale or to rent," the edifice of the United States Bank.  It is a very beautiful building of white marble, Doric order, a colonnade in front and another in the rear.  The ground on which it stands cost 100,000 dollars, and the building is commonly reported to have cost 250,000 dollars: but we believe it to have cost nearly double that sum.  Next we have "for sale or to rent," the Pennsylvania Bank on Second street.  This also is of white marble, with a colonnade in front and another in the rear, and has attached to it a beautiful garden.  This is of the Ionic order.  Then there is the Girard Bank, on Third street.  Its front is of white marble, and it has a colonnade in front.  Order, Corinthian.

Take your choice, gentlemen, Doric, Ionic, or Corinthian.  It will be difficult to find in any other American city, three buildings equal to these in richness of material, and beautiful simplicity of style.

Resumption of Specie Payments.

This is the order of the day.  In Pennsylvania we are, it is said, to have immediate resumption --at least if Act of Assembly can bring it about.  In Maryland it is to take place in May.  In New Jersey in August.  In Virginia it is to be made contingent on resumption in Pennsylvania and Maryland.  And in Louisiana it is to take place in September.

Supposing the effort to succeed, the result will be merely a rebuilding of the old system.  We firmly believe it would be easier to establish a new and comparatively sound system of banking, than to rebuild the old one.  We believe it would be better for the people, and better for the banks.  But for so thorough going a proceeding, neither banks, nor people, nor legislative bodies, seem to be prepared, and this resumption movement, with its effects, is to form a new chapter, or rather a new book comprising many chapters, in the History of Banking.


We are in bad condition in Pennsylvania.  We have, it is true, an extensive territory, a fertile soil, unbounded mineral riches, and every facility for commerce and manufactures.  We have, moreover, a population of 1,700,000, consisting principally of people who are industrious, frugal, and enterprising.  Our wealth is very considerable.  The property assessable for county purposes, is estimated at not less than five hundred million dollars;  and the annual products of the State at not less than two hundred millions.

Notwithstanding this, the State Government is bankrupt.  It owes about forty million dollars, and has begun extensive lines of "internal improvement," which cannot be abandoned without loss;  and to raise the means of finishing which seems to be impossible.  To negotiate fresh loans in the market, or to extort much more from the banks, is impossible.  Taxes cannot be levied in time to meet the demands of the clamorous creditors of the public.  There is no recourse, but in the issue of State script, in such amounts as to serve as a circulating medium.  And this, the last step downward in the progress of the paper credit system, is the step about to be taken by the authorities at Harrisburg.

The Committee of Ways and Means of the House of Representatives, have brought in a bill, which is intended to authorize the issue of such script to the amount of 1,800,000 dollars, wherewith to pay for work done upon, and materials furnished for, the different lines of internal improvements.  These certificates are to bear interest;  but as they are to be of as low an amount as five dollars, interest on them from short periods will be hardly appreciable.  This, and their being receivable in payment of dues to the State, will make them a kind of circulating medium, unless they should sink so low in value as not to be available for this purpose.

These "distress notes" (such we hope they will be called) will be of less value than the present "relief notes," because they will not be receivable in payment of debts due to the banks.  But they will be of more value than State stocks, because they will be receivable in payment of debts due to the State, (which State stock is not,) and because issued for small amounts.  The receipt of them will, by many persons, be a matter not of choice, but of necessity.  They will have to take them, or take nothing.

In paying a debt to the State, "distress notes" will be preferred to "relief notes," because of less value.  Thus the revenue of the State will be paid in the worst medium.

The difficulties of the banks will be considerably increased, because the burden of redeeming the "relief notes" by receiving them in payment of debts, heretofore shared between the banks and the State, will, hereafter, be thrown almost entirely on the banks.

Thus we go on, from bad to worse.


In Baltimore there have been some fears of a popular out break.  Crowds, or "simultaneous meetings," as they have been called, gathered nightly in the streets, "to discuss matters and things in general, and the currency in particular."  They generally preferred the front of the brokers' offices or currency shops for their assemblages: and at one of their meetings they burned the effigy of Senator Scott, because the said Senator had voted against resumption of specie payments.

The Baltimore correspondent of the Philadelphia Ledger, writing under the date of March 5th, says, "Crowds have gathered nightly in the Monument Square, with no ostensible purposes, and remarks of a most angry character could every where be heard.  As yet no outbreak has taken place, though there is a universal apprehension that, unless something is speedily done, the dark mutterings will end in a perfect hurricane of destruction.  I fear the issue, knowing as I do that the civil authority are firmly backed by the military, every company having been under orders for immediate movement for the past week."

So, then, these are some of the effects of our paper money system.  By it the people are driven to the very borders of desperation, and then the military are called out to support the civil authorities !

Happily, in the present case, popular feeling manifested itself in a peaceful manner.  About four or five hundred of the citizens of Baltimore, repaired to the capital, Annapolis, and marched with banners and music to the State House.  On the hill they arranged themselves, and were then addressed by one of their delegates.  After this a venerable and aged clergyman "addressed the throne of grace, invoking Divine aid in directing the deliberations of the guardians of the people, and that they might conduce to their relief and aid."  After appointing a committee of their number to deliver their memorial, the whole mass retired in a quiet and orderly manner, first calling on the Governor.

Bank Failures.

The Central Rail Road and Banking Company of Georgia, has suspended specie payment.  The Chancellor of New York has caused an injunction to be served on the Watetvliet Bank at West Troy.  In our western exchange papers, we observe no confirmation of the report mentioned in our last, of the failure of the Bank of Xenia.  On the contrary, its credit is represented to be as good as that of any other of the country banks of Ohio.


Our banks, and brokers, and "business men" have all been thrown into confusion by the strange proceeding of the Legislature.

No longer ago than May last, the Legislature entered into a covenant with certain banks, the condition of which was, that if the said banks would aid the Legislature in violating or evading that provision of the United States Constitution which prohibits the issue of bills of credit, then the said banks should be released for four or five years from the obligation of paying their debts to the people.  It was a covenant which neither banks nor Legislature had a right to make;  but it was made, and the "relief banks" shaped their course accordingly.

The banks that did not enter into this "covenant," conducted themselves, generally speaking, with great prudence, issuing few notes of their own, and receiving deposits only on condition of paying them "in current funds," by which they meant inconvertible paper.

The Girard Bank broke, and then the Bank of Pennsylvania, and, immediately on the heel of the latter event, a bill was introduced into the House of Assembly to coerce the immediate resumption of specie payments !  The whole movement was so strange that it led many persons to question the intelligence of the members of the Legislature, and some even went so far as to doubt the purity of their motives.

The bill was bandied about for some time between the House and the Senate: but it at length received a majority of the votes of the members of both Houses, and on Saturday was signed by the Governor.

On Monday, March 14, the banks should have resumed specie payments, "according to the Act of Assembly."  But the "relief banks" threw themselves on their reserved rights, and the other banks declared that they had no official notice of the passage of the law !  No specie was paid.

In what is to follow, we shall have new revelations of the character of the paper money system, and of the kind of legislation to which it leads.  If there is any design of substituting State paper money, for Bank paper money, the public will not be gainers by the change.