A Short History of Paper Money and Banking

In a rising country, sound credit is of equal importance with sound currency. Through its operation, the advantages of capital are more equally diffused than would otherwise be possible. The man who has more capital than he wishes to employ in his own business, and the aged and infirm who possess wealth, lend it to the young and active. By these means, much capital is made productive, which must otherwise have remained unproductive; and many persons find employment who must otherwise have been idle. The wealth of the nation is increased, and lenders and borrowers are mutually benefitted. The former receive their just share of profits, in the shape of interest; and the latter keep another share as a recompense for the trouble of management.

To have a system of sound credit, nothing more is necessary than to have a sound money system, and to enforce the faithful performance of honest contracts.

In the countries forming the present United States, credit has never been perfectly sound. In an early period of our colonial history, arbitrary alterations were made in the legal valuation of the current coin. Then came the paper money of the Provincial Governments, and the Continental money of the Revolutionary Congress, together with tender laws, supported by penal enactments. Men of property were careful in making loans, as they knew not but that, between the time of lending and receiving back, such alterations might be made in the currency, that they would be paid in money of much less value than that which they lent.

Notwithstanding this, as business was much less uncertain than it is now, men whose moral character was such as to afford a guarantee that they would not take advantage of unjust laws to injure their creditors, found little difficulty in borrowing. But moral character is no longer security for the re-payment of loans; for, the sudden vicissitudes of fortune, which are produced by the Banking system, make very great changes in the moral feelings of men. Many a one who has, while his affairs are prosperous, every disposition to fulfil his engagements, becomes very careless about them, when he finds his affairs declining.

As industry and economy no longer insure success in business, nothing short of real estate is regarded as adequate security for the re-payment of a loan. This security many men, in whose hands capital would be very productive, are unable to give. And thus, while the rich are prevented from lending their funds in the manner which would be most advantageous to themselves, not a few industrious and enterprizing persons are prevented from exerting their faculties in the way which would be most beneficial both for themselves and for the community. Some, from the impossibility of obtaining capital to work with, are like mechanics without tools—useless both to themselves and to the nation.

This practice of lending on bond, to which Banking has nearly put an end, was, perhaps, more advantageous to the country, than any other kind of lending. Men who have real estate, could find means for employing their faculties to advantage, even if they were not able to borrow on mortgage. They might till their farms, if their real estate consisted of farms; or if it consisted of houses, they might, by renting their houses, obtain capital enough to engage in some active business. But men having no capital of their own, and unable to borrow, must, unless employment is afforded them by others, remain in absolute idleness.

It is now, indeed, possible for such men to borrow from the Banks, if their indorsers please the Directors. But the loans of the Banks are for 60 or 90 days, while months, and even years, are required for bringing the enterprizes of the farmer and the mechanic to successful completion. Short loans are useless to them. The Banks may, indeed, renew the accommodation, but this depends on contingencies; and the curtailments in time of pressure are so ruinous, that a man acts very unwisely who borrows large sums from the Banks, or who borrows them for a long period.

When Dr. Franklin arrived in this city, more than a century ago, he was a poor and friendless journeyman printer. The amount of loanable capital held by the Philadelphians was small. Yet, he had been here but a short time, before his neighbors, without solicitation on his part, offered to lend him money to establish him in business. A thrifty young mechanic who should now attempt to borrow 500 or 1000 dollars, for a term of two or three years, on his personal security, would be regarded with astonishment. Yet this young mechanic has a capital in his faculties which would entitle him to a loan of more than 500 dollars, if the state of credit were sound. If his labor yields him six dollars a week, and his expenses of living are four; he will have a surplus of 104 dollars at the end of the year. This would pay the interest on upwards of 1700 dollars. His chance of living, if he is twenty-one years old, is, according to the doctrine of life-insurances, at least thirty years. After making every allowance for contingencies, a loan of 500 dollars to such a young man, might be considered quite a prudent act, and such a loan might enable him to double his weekly revenue. But the uncertainty of business, and the instability of moral character which is produced by uncertainty of business, are such, that capitalists deem the chances of re-payment not sufficient to justify lending to young mechanics: and the embryo Doctor Franklins who are among them, are left to contend with adversity, without assistance from their richer neighbors.

As there is no borrowing at present on personal security, except from the Banks, many persons suppose that if there were no Banks, there would be no borrowing at all. But Banks do not increase the amount of loanable capital in the country. The loanable capital of each year, is the wealth which its owners do not choose to employ in their own business. All Banking can do, is, to take this loanable capital out of the hands of its owners, and place it under the control of irresponsible corporations.

If those who have honestly paid their cent. per cent. for Bank stock, could get their money back, and lend it on bond, it would be more secure than it is at present. Much of that money has been lent by the Banks to wild speculators. It would be in safer hands, if lent to industrious farmers and mechanics, and plain dealing merchants and storekeepers. We mean, of course, if we had a sound money system, and a sound credit system built thereon, and that sound moral character which proceeds from a sound money and sound credit system. At present, it is not prudent to lend on any security short of real estate. Such is the precariousness of business, that men who do not like to incur debts which they may be unable to pay, are scrupulous about borrowing on bond, unless their personal estates are so large as to cover all risk.