A Short History of Paper Money and Banking

CHAPTER XII. Of the Essential qualities of Bank Notes.

Bank notes are considered by some as “representatives of specie.” But, for every silver dollar they have in their vaults, some of the Banks have two paper dollars in circulation, some three, some five, some eight, and some thirteen. Bank notes cannot represent that which the Banks have not, and which is not in the country. If Bank notes can, in any sense, be considered representatives of specie, the paper dollar of the same Bank sometimes represents fifty cents, and sometimes forty cents: and the paper dollars of different Banks represent at the same time, thirty-three and a third cents, twelve and a half cents, ten cents, and seven cents of the silver dollar. Yet they are all current, and all have the same effective power as silver in exchanges.

Various other erroneous views are entertained of the nature of Bank notes, the consideration of which would be tedious. Examining them one by one, would be merely showing what Bank notes are not. Instead of doing this, it will, it is presumed, be sufficient to show what Bank notes really are.

Bank notes are simple evidences of debt due by the Banks. This is their true character.

As mere evidences of debt, they differ not from the promissory notes of merchants. They are also, in common with bills of exchange and business notes, a commercial medium; but in some respects, there is an essential difference between Bank notes and the notes of merchants.1

For their promissory notes, the merchants pay interest. For the promissory notes of the Banks, the Banks receive interest.

The promises to pay of the merchants are fulfilled, when the notes arrive at maturity. Bank notes are never paid.2

Payment of them in the aggregate is never demanded, because what could be got in payment, would, for most purposes of domestic trade, serve no better purpose than Bank notes themselves.

Bank notes are thus a kind of paper money. In the countries where they are used, bills of exchange, the promissory notes of merchants, and balances of running accounts, are paid in Bank notes, as they are paid in other countries with metallic money.

The sales for prompt payment in Bank notes regulate sales for deferred payment in Bank notes, as, in solid money countries, cash transactions regulate credit transactions.

Like real money, Bank notes are instruments of valuation. The quantities they express are the exponents of the effective power in exchanges of land, labor, and commodities.

An increase or decrease of Bank notes in the United States, has the same effect on prices, that an increase of solid money has on prices in Spain or Switzerland.

Increase the amount of Bank notes, and, other things being the same, prices will rise.

Diminish the amount of Bank notes, and, other things being the same, prices will fall.

In our first chapter, the several qualities of gold and silver were enumerated, all which qualities an article must possess in the same degree, to serve as well as the precious metals the purposes of money. In proportion as the qualities of articles recede from those of gold and silver, they are unfitted for these uses. By a comparison of the different qualities of Bank notes and coin, the reader may acquire a clear conception of the difference between real money and fictitious.

In susceptibility of receiving an impression, and in comprising a great value (i. e. market value) in a small space, Bank notes agree with coin. But in every thing else they disagree. Of utility in the arts, the very attribute that gives gold and silver their value in commerce, Bank notes are utterly destitute. They are also destitute of the important qualities of unchangeableness of value, and of uniformity of value.

We, however, because we have never changed our money of account, fancy that we have never changed our standard of value. We call a Bank dollar by the same name as a silver dollar, and then fancy there is no essential difference between them.

In our mensuration of other things which admit of increase or decrease by homogeneous degrees, we use instruments possessing the same physical properties as the thing to be measured. The judgment the mind forms of weight or length, is regulated by a material standard. The judgment the mind forms of value, is regulated by an ideal standard; for Bank credit is something altogether intangible.

In solid money countries, in all sales of goods for cash, the products of labor are exchanged for the products of labor. The product of the miner’s labor, is made the instrument for circulating the products of the farmer’s and of the manufacturer’s labor. The transactions are removed but one step from simple barter, and do not differ from it in its essential principle. The exchanges on both sides are of articles possessing inherent value—articles in the production of which labor has been bestowed, and articles which possess the physical qualities which adapt them to the satisfaction of human wants and desires. We receive commodities from one another, and give in return some uncertain representatives of credit, and fancy that trade is conducted with us on the same principles as it is in those countries where paper money is unknown. We pass from hand to hand certain promises to pay, and call that making payment.

The relations in the supply and demand of the precious metals are so slow in changing, that hardly any perceptible variation in the value of silver has, according to some able authors, taken place in the last two centuries. But the supply of Bank notes may vary several per cent. in different periods of the same year, and twenty or thirty per cent. in three or four years. Thence come great rises and falls of price: but we have only an imperfect apprehension of the cause, for our intangible standard of value never changes its name, how great soever may be the extent in which it is contracted or expanded.

It is folly to say that the money of the country is not paper money. In Virginia, Pennsylvania, and Maryland, payments of a less amount than five dollars are made in real money: but in the other States, dollar notes circulate, so that payments in specie are made for only fractional parts of the dollar. In North Carolina, South Carolina, and some other parts of the Union, notes for 25 cents, 12½ cents, and even 64¼ cents, are current. There even small silver change is a rarity.3

Of large payments, nine hundred and ninety-nine in a thousand are made with paper. Of small payments, ninety-nine in a hundred. The currency of the country is, we repeat it, essentially a paper currency. The sprinkling of silver has only the effect of keeping up the reputation of the paper. This paper varies in amount, from day to day, from month to month, and from year to year. Every thing that affects the spirit of enterprize, affect scorn mercial credit, and through that, Bank credit.

The importance of adjusting measures of value with the greatest exactness, is enforced by all who have written on the subject. An order has recently been issued to re-coin the whole of the silver money of France, amounting to not less than eighty millions of dollars, on account of its having been discovered that the mode of assay by cupellation, indicates but 1000 grains of pure silver in a mass containing 1004 grains. The difference between the legal and the practical standard, is less than a half of one per cent.; yet this difference has been deemed important enough to make necessary a re-coinage of the whole of the silver money of the country. Our own statesmen bear a silent testimony to the truth of this doctrine, by their attempts to determine the ratio of gold and silver, carrying out their calculations in some tables to the five hundredth thousandth part of a grain.

Such is the care that Governments (our own among others) take in fixing metallic standards and measures of value. If by any accident a dollar coined at our mint should contain but 369 grains of pure silver instead of 371¼, it would not be put in circulation. The nicest chemical and mechanical operations are resorted to that the different pieces may have an exact uniformity. But, having done this, our next care is to drive metallic measures of value from the country, and substitute those of the most uncertain nature possible.

 

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4 “A bill of exchange drawn by an individual or individuals who do not issue notes having the character of currency, appears to us to be clearly distinguished from a Bank note, though it is a substitute, and lessens the amount of currency which would otherwise be required. A payment made in Bank notes is a discharge of the debt, the creditor having no further recourse against the person from whom he has received it, unless the Bank had previously failed. The bill of exchange does not discharge the debt, the person who receives it having recourse against the drawer and every preceding endorser, in case the drawer should fail or refuse to pay. But the essential distinction is, that bills of exchange are only promises to pay in currency: and that the failures of the drawers, drawees, and endorsers, does not in the smallest degree, affect the value of the currency itself, or impair that permanent standard of value by which the performance of all contracts is regulated.”

Gallatin.

5 “The essential difference between Banking and other commercial business is that merchants rely for the fulfilment of their engagements on their resources, and not on the forbearance of their creditors, whilst the Banks always rely, not only on their resources, but also on the probability that their creditors will not require payment of their demands.”

Gallatin.

6 It is observed by Mr. White, Cashier of the United States Branch Bank at Baltimore, in a letter to the Secretary of the Treasury, under date of Feb. 30th, 1830: “Congress fixed the relative value of gold at 15 for 1 of silver; and under the natural presumption that gold and silver coin would compose a portion of the general circulating medium, it has also been enacted, that a tender of either of those metals should be the only legal mode of discharging obligations. In practice, however, and in fact, our currency consists altogether of paper. In this State, (Maryland,) and in Pennsylvania, Virginia, and perhaps some others, the fractional parts of a dollar circulate in sufficient quantity to purchase with coin, marketing, or other low priced necessaries; but in the Carolinas, Georgia, and all that great district eastward of Pennsylvania, composing the States most distinguished for commerce and manufactures, and for wealth, there is no transfer of the value of the established unit that is not effected by paper. This Bank paper is sustained by public confidence on a specie basis, considered sufficient to liquidate balances accruing among the several States, and to supply the demands for foreign commerce.”

• 1* “A bill of exchange drawn by an individual or individuals who do not issue notes having the character of currency, appears to us to be clearly distinguished from a Bank note, though it is a substitute, and lessens the amount of currency which would otherwise be required. A payment made in Bank notes is a discharge of the debt, the creditor having no further recourse against the person from whom he has received it, unless the Bank had previously failed. The bill of exchange does not discharge the debt, the person who receives it having recourse against the drawer and every preceding endorser, in case the drawer should fail or refuse to pay. But the essential distinction is, that bills of exchange are only promises to pay in currency: and that the failures of the drawers, drawees, and endorsers, does not in the smallest degree, affect the value of the currency itself, or impair that permanent standard of value by which the performance of all contracts is regulated.”
• 2† “The essential difference between Banking and other commercial business is that merchants rely for the fulfilment of their engagements on their resources, and not on the forbearance of their creditors, whilst the Banks always rely, not only on their resources, but also on the probability that their creditors will not require payment of their demands.”
• 3* It is observed by Mr. White, Cashier of the United States Branch Bank at Baltimore, in a letter to the Secretary of the Treasury, under date of Feb. 30th, 1830: “Congress fixed the relative value of gold at 15 for 1 of silver; and under the natural presumption that gold and silver coin would compose a portion of the general circulating medium, it has also been enacted, that a tender of either of those metals should be the only legal mode of discharging obligations. In practice, however, and in fact, our currency consists altogether of paper. In this State, (Maryland,) and in Pennsylvania, Virginia, and perhaps some others, the fractional parts of a dollar circulate in sufficient quantity to purchase with coin, marketing, or other low priced necessaries; but in the Carolinas, Georgia, and all that great district eastward of Pennsylvania, composing the States most distinguished for commerce and manufactures, and for wealth, there is no transfer of the value of the established unit that is not effected by paper. This Bank paper is sustained by public confidence on a specie basis, considered sufficient to liquidate balances accruing among the several States, and to supply the demands for foreign commerce.”
• 4As mere evidences of debt, they differ not from the promissory notes of merchants. They are also, in common with bills of exchange and business notes, a commercial medium; but in some respects, there is an essential difference between Bank notes and the notes of merchants.*
• 5The promises to pay of the merchants are fulfilled, when the notes arrive at maturity. Bank notes are never paid.†
• 6It is folly to say that the money of the country is not paper money. In Virginia, Pennsylvania, and Maryland, payments of a less amount than five dollars are made in real money: but in the other States, dollar notes circulate, so that payments in specie are made for only fractional parts of the dollar. In North Carolina, South Carolina, and some other parts of the Union, notes for 25 cents, 12½ cents, and even 64¼ cents, are current. There even small silver change is a rarity.*