A Short History of Paper Money and Banking

The evils which are produced by paper money Banking, are so great as necessarily to force themselves on the attention of those who are most deeply interested in the continuance of the system. To remedy these evils, they propose various restrictions on Banking corporations, or new modes of conducting their business.

A common opinion is, that, if the Banks would not discount accommodation notes, and if they would confine themselves to business paper of short dates, their operations would not be injurious to the community.1 But, a little reflection may convince us, that, by discounting business paper, as much Bank paper might be set afloat, as by discounting accommodation notes. The same lot of goods might be sold to a dozen persons, and each might give a note, and each of these twelve notes might be discounted at Bank. The limit on Bank issues would be the same as at present—that is, the demand for specie for foreign trade. The anxiety of the Banks to extend their issues would be in no way diminished. The inducement, then, would be to buy and sell goods that notes might be discounted at Bank. Now, it is to have notes discounted at Bank, that goods may be bought and sold. The spirit of speculation being excited by any cause, notes would flow in for discount, and the Banks would, as at present, discount as many as they might deem prudent.

The severest legislative enactments could not confine the Banks to discounting business paper of short dates, if this paper did not afford full employment to all their “capital” and all their “credit.” They would soon find sufficient reasons for “renewing” the business notes of some of their customers, and those notes, thus renewed, would become accommodation notes.

Except in the cases of applications from Directors, and their favorites, the Banks now prefer business notes, because these place their issues more immediately under their control. More than a certain amount they cannot lend on accommodation paper, for they must keep so much capital under command as is necessary to support their credit. Their deposits would otherwise be withdrawn, and the circulation of their notes would cease. It does not appear that these accommodation notes have any specially mischievous effect on prices. They are permanent in amount, or nearly so. The fluctuation of prices appears to be occasioned by that part of Bank “capital” and of Bank “credit,” which is always varying in amount.

Limiting the amount of issues to double the amount of capital, and the amount of loans to thrice the amount of capital, is a favorite provision with legislators. But, Mr. Gallatin says, “amongst more than three hundred Banks, either now existing, or which have failed, and of which we have returns, we have not found a single one, the loans of which amounted, so long as specie payments were in force, to three times, or the issues to twice, the amount of capital. It is clear, that provisions applicable to such improbable contingences, are purely nominal.”

Compelling the Banks to give an annual statement of their affairs, is also a favorite measure. But it is not easy to compel them to give a faithful statement. The accounts of the Banks that break look nearly as well on paper as the accounts of the Banks that continue payments. They who are acquainted with the secrets of Bank management, say, little reliance is to be placed on these accounts.

Preventing the Banks from issuing notes of a less denomination than five dollar’s, is a measure which is effective so far as it goes. But it still leaves the Banks the power to substitute paper for specie, and to carry on credit dealings to an extent which is very pernicious. In England, where the issue of notes of a less denomination than one pound sterling, or about four dollars and eighty cents, has, for many years, been prohibited, the contractions and expansions of the Bank have done so much evil, that it has been found necessary to prohibit the emission of any notes of a less denomination than five pounds sterling, or about twenty-four dollars Federal currency. The Bank of France issues no notes of a less denomination than 500 francs, equal to about ninety-four dollars of our money, yet the Bank of France is at times forced to make such sudden and great curtailments, as inflict much evil on many of those who are within the sphere of its influence. The manufacturers in Alsace had doleful experience of this power of the Bank in France, in 1825. The merchants of Paris, and throughout the kingdom, felt it in 1819. In 1822, also, the contractions which tile Bank of France found it necessary to make, produced much commercial embarrassment in many parts of that country.

In the charter of the Bank of France, there is a provision that all profits above six per cent. shall be converted into a reserved stock, on which reserved stock the Bank may make dividends not exceeding five per cent. Such a provision in the American Bank charters, would remove many inducements to over-banking, and would make speculations in their stock less frequent.

In proportion as the personal responsibility of those concerned in Banking is increased, and in proportion as the denomination of the notes they are permitted to issue, is raised in amount, the system becomes less pernicious. But no legislative enactments can afford an adequate remedy for the evils which flow from incorporated paper money Banks. The system is, to use the language of the lawyers, malum per se—or a thing which is evil in its nature. The very principle of its foundation is wrong. No immunities should, in a Republican Government, be granted to any, save those which are common to all. To impart to corporations a moral sense of right and wrong, is impossible. They may be made nominally responsible, but to impose on them an effective responsibility is impracticable. To a certain extent they obey the laws, and respect public opinion, but it is only so far as, and so long as, is necessary for making their business profitable. The interest account of the Banks is, in point of fact, the only effective check we have on the abuse of those powers which our legislative bodies have conferred on them by charter.

Such privileges as the Banks possess, ought neither to be sold nor to be given away, by a republican legislature, to any men or any body of men. A control over the whole of the cash and the credit of the community, is a power as despotic in its nature as any possessed by the nobility of Germany.

The regulation of the currency is one of the most important prerogatives of sovereignty. This prerogative is now, in point of fact, surrendered to the Banks. They drive away what may be called the natural money of the country, and substitute for it something which differs from this natural money in both the nature of its value, and the causes of its value. A quantity of this money may be put afloat, but, whatever may be the discretion of Directors of Banks, and whatever may be the legal restrictions on corporations, it must fluctuate in quantity, and be affected in value, by all the causes, natural and political, by which credit is affected. It is flexible, vacillating, agitated by every wind that blows. If any man can invent a method by which the hardness and other properties of platina can be imparted to lead, that man may hope to discover the means by which Bank credit may be made as stable as gold and silver medium.

To prove that the task is hopeless, we shall give an analysis of the standard and measures of value introduced by Banking.

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2 This opinion was sufficiently refuted by the Bullion Committee, so long ago as 1811 ; and the correctness of their conclusion is confirmed by those who have had the best opportunities for observing the operations of the Banking system. “I consider the opinion entertained by some,” says Sir F. B., “that the Bank ought to regulate its issues by the public demand, as dangerous in the extreme; because I know by experience, that the demand for speculation can only be limited by want of means.” The general practice in England is to discount only business paper, but this does not prevent the recurrence of evils similar to those we suffer in the United States.

• 1* This opinion was sufficiently refuted by the Bullion Committee, so long ago as 1811 ; and the correctness of their conclusion is confirmed by those who have had the best opportunities for observing the operations of the Banking system. “I consider the opinion entertained by some,” says Sir F. B., “that the Bank ought to regulate its issues by the public demand, as dangerous in the extreme; because I know by experience, that the demand for speculation can only be limited by want of means.” The general practice in England is to discount only business paper, but this does not prevent the recurrence of evils similar to those we suffer in the United States.
• 2A common opinion is, that, if the Banks would not discount accommodation notes, and if they would confine themselves to business paper of short dates, their operations would not be injurious to the community.* But, a little reflection may convince us, that, by discounting business paper, as much Bank paper might be set afloat, as by discounting accommodation notes. The same lot of goods might be sold to a dozen persons, and each might give a note, and each of these twelve notes might be discounted at Bank. The limit on Bank issues would be the same as at present—that is, the demand for specie for foreign trade. The anxiety of the Banks to extend their issues would be in no way diminished. The inducement, then, would be to buy and sell goods that notes might be discounted at Bank. Now, it is to have notes discounted at Bank, that goods may be bought and sold. The spirit of speculation being excited by any cause, notes would flow in for discount, and the Banks would, as at present, discount as many as they might deem prudent.