A Short History of Paper Money and Banking

The events of the last thirty years, have created a suspicion in most men’s minds, that there is something not exactly right in our Banking system. Indeed, the very head of the system, the President of the United States Bank, seems at times half a sceptic as to its utility. He acknowledges that it is attended with great danger; but then he says, “the substitution of credit for coin, enables the nation to make its exchanges with less coin, and of course saves the expense of that coin.”

Mr. Gallatin, who is now President of the National Bank at New York, goes still farther. “The substitution of a paper currency for the precious metals, does not,” he says, “appear to be attended with any other substantial advantage than cheapness.”

Bank notes, it must be confessed, come very cheap to those who issue them. But to those who receive them, Bank notes come as dear as gold and silver. The farmer must give as much of the product of his labor for a paper dollar, as for a silver dollar.

It is alleged by some, that “Bank notes increase the aggregate capital of the community, since they cause silver, which produces nothing, to be exchanged abroad for commodities useful in the arts, or for household consumption.”

But it is not true that silver money produces nothing. It is as productive as any other labor saving machine. Its uses in commerce, are as great as those of the steam engine in manufactures.

Neither is it true, that the aggregate capital of the country is increased, when silver coin is displaced by Bank notes. A mere exchange is made of one kind of capital for another. The precious metals are exported, and laces, wines, silks, satins, and ostrich feathers, are received in return. A nation that carries its consumption of foreign luxuries so far, as to leave itself without a suitable medium for domestic exchanges, may be compared to a mechanic who barters the tools of his trade for the enjoyments of the ale house. Money is the tool of all trades.

But on the supposition most favorable to the friends of the Banking system, what sum is gained by the nation by the substitution of paper for specie?

According to the calculation of Mr. Gallatin, the currency of the country consisted, on the 1st of January, 1830, of about ten millions of dollars in specie, in the hands of the people, of 54 millions of Bank notes, and 55 millions of Bank credits; making a total of 109 millions of Bank medium, for the support of which the Banks keep 22 millions of specie dead in their vaults.

Now, supposing Bank medium to fall into disuse, these 22 millions of specie would be set free, and 87 millions more would be required to bring up our currency to its present amount. What is this, when compared with the whole capital of the country, which is estimated by Mr. Lee of Boston, at ten thousand millions of dollars, and by two other able economists, at twelve thousand millions. What is it, even when compared with the aggregate of incomes, which, according to Mr. Niles and Mr. E. Everett, is one thousand millions a year?

It should be recollected, that, on the supposition of something being gained by the nation, by the use of paper money, the saving is once for all, and the annual gain is no more than the interest on the amount of medium. Now, the interest on 87 millions, at six per cent., divided among the individuals who constitute our nation, is about 40 cents a piece!

Is it wise, for so trifling a gain, to derange all our monied operations?

But if the inquiry be pushed further, it will be found that nothing is gained by the nation, (we do not say that nothing is gained by certain persons,) even on the supposition most favorable to the Banks.

For a specie medium, but one mint would be necessary. To maintain a paper medium, we have from 300 to 400 paper mints. The expenses of these mints press heavily on the people. The expenses of the Bank of the United States and its offices, are about 500,000 dollars a year.

According to Adam Smith, three million people, in the countries now forming the United States, were governed, and well governed, before the Revolution, at an expense not exceeding 350,000 dollars a year.

The labors of the American people for a few weeks would purchase them a sufficiency of metallic medium, which would not require renewal for a hundred years. To support our paper medium, we are frequently obliged to purchase specie abroad, at a disadvantage. As there is no profit on paper money, except by keeping down the amount of specie in the vaults of the Banks, the precious metals are frequently exported and sold at a loss.

The cheapness or dearness of an instrument, is to be estimated by the annual expense to which it puts us, in addition to its original cost, and by the manner in which it serves the uses intended. Bank medium is a machine which requires continual watching, which is always getting out of order, which requires frequent and expensive repairs, and which, after all, performs its work badly.

Men have passed from one extreme to the other. A hundred years ago, the chief feature in the commercial policy of nations, was the amassing of gold and silver, as a kind of wealth par excellence. Now, he is the wisest statesman, who is most successful in driving the precious metals from a country.

In their attempts “to economize specie,” as they call their absurd and nefarious policy, they seem to be forgetful of economy in every thing else. Correct measures of value, it must be confessed, cost something. So, likewise, do correct measures of weight and of capacity. A metallic medium cannot be obtained without paying for it; but whatever it may cost, it is well worth its cost. Our roads and our canals, which are, like money, instruments for facilitating exchanges, cost immense sums. So, also, do our ships, and our manufacturing machinery.

Among labor saving machines, gold and silver coin are entitled to the first place. In no way can a nation invest a portion of its capital more profitably, than in a sound circulating medium. It will return its original cost a hundred fold. Without such a medium, it is impossible for contracts to be complied with in equity, or for productive industry to exert all its energies.