A Short History of Paper Money and Banking

As paper drives specie out of circulation, so, the withdrawal of paper brings specie Bank again. Wherever there is a vacuum it flows in, unless political regulations counteract its tendency to find its own level.

If we gradually withdraw Bank notes from circulation, no evil will ensue, for specie will immediately supply their place.

The proper mode of proceeding would be, to begin with the smallest notes, and proceed gradually to those of the highest denomination.

Mr. White, of New York, in his report to Congress, made in February, 1831, estimates the amount of notes in circulation of a less denomination than five dollars, at not more than seven millions. This does not exceed the amount of gold and silver we sometimes import in one year. But, through the use made of paper, the gold and silver imported in one year are exported in the next. Let small notes fall into disuse, and an equal amount of specie will be retained in the country.

The amount of five dollar notes in circulation is estimated by Mr. White at ten millions. Two years after the act to prohibit the issuing of small notes, it would be perfectly safe to prohibit the issuing of notes of a less denomination than ten dollars.

In two years more, the prohibition might be extended to notes of a less denomination than twenty dollars. Our currency would then be on a par with that of Great Britain.

In two years more the issue of notes of a less denomination than fifty dollars might be forbidden; and in two years after that, the issue of notes of a less denomination than 100 dollars.

In this way, in the short period of ten years, and without producing any commercial convulsion, specie might be made to take the place of paper.

We speak from experience. The principles of the measure have been tried in Virginia, Maryland, and Pennsylvania. In the way in which these States have got rid of small notes, the other States may get rid of them. In the way in which small notes have been driven from circulation, notes of every denomination may be made to give place to specie.

In some parts of Pennsylvania, violent opposition was made to the act to prohibit the circulation of small notes, from an opinion that it would “make money scarce.” The grand juries of the counties of Beaver and Erie went so far as to present it as a nuisance. But the Legislature remained firm in its purpose, and many of the former opponents of the law are now among its warmest supporters. The effect of the measure was just such as its friends predicted. An immense quantity of trash disappeared from circulation, and its place was supplied with silver.

The principles of the measure have also been tried in England, where, in 1829, the issue of notes of a less denomination than five pounds sterling was prohibited. The proceeding there was from notes of one pound, or four dollars eighty cents, to notes of five pounds, or twenty-four dollars—a greater jump than would be advisable in America.

Some of our most distinguished statesmen appear to be of opinion that, if it were possible to substitute a metallic for a paper medium, it would greatly promote the interests of the country. Nothing hinders, but want of inclination. If either of the great political parties into which our nation is divided, would take a decided stand in favor of sound currency and sound credit, the cause of sound currency and sound credit would be triumphant. The industrious classes of the nation would array themselves with that party, as soon as they could be made to understand the question, and the speculators and their satellites would be vanquished in the contest.

If our national debt was of great amount, and if our taxes were heavy, some difficulties might be experienced in passing from a paper to a metallic medium. But our national debt is now merely nominal, and the taxes payable to the United States may, if necessary, be reduced, without diminishing the efficiency of Government. A country and a people possessed of so much elasticity, could bear greater changes than any here proposed.

Of the perfect feasibility of the measure, we may be convinced in another way. Our exports of domestic produce amount annually to between fifty and sixty millions of dollars. If we should buy from five to ten millions a year of gold and silver, for ten years, we should still have between forty and fifty millions to expend in the purchase of European manufactures, and East and West India products. If, by the withdrawal of paper, a demand for specie to the amount of twenty millions annually should be created, it could readily be supplied. England, in four years, on the resumption of specie payments, imported twenty millions sterling in gold alone. Our demand could be supplied by both gold and silver.

Supposing the withdrawal of the Bank notes should cause a diminution of Bank discounts of equal amount, the effect, if we proceeded gradually, would be almost imperceptible. If two years were allowed for the withdrawal of small notes, the diminution of Bank discounts would, in this period, and on this supposition, be at the rate of 3,500,000 dollars a year. In the single city of Philadelphia, there have been, in periods of less than a year, reductions of Bank discounts to as great an amount as is here proposed for the whole country.

According to the estimate of Mr. Gallatin, the whole amount of Bank notes in actual circulation, in 1830, was about 54,000,000. Surely it will not be said, that our whole nation cannot pay off an amount of Bank debt, equal to the amount of Bank notes in circulation, in the period of ten years.

But, supposing we should, in the course of ten years, choose to pay off an amount of Bank debt, equal to the whole amount of Bank medium, or of both Bank notes and Bank credits, amounting together to 109,000,000, would it be a work of insuperable difficulty? In the last seven years, the Government has paid off the public debt at the rate of eight or ten millions a year: can we not, all of us together, pay off between eleven and twelve millions a year of Bank debt?

In a pamphlet entitled “Remarks on the Annual Treasury Report,” published in 1828, and said to be written by two practical economists, distinguished for their talents and information, the whole capital of the country is estimated at 12,000,000,000 dollars, and its productive industry at 600,000,000 annually. Mr. Lee of Boston, seems to suppose the national capital is not more than 10,000,000,000, but he increases the national income to 700, or 800 millions. In the Harrisburgh address, drawn up by Mr. Niles, in 1828, our productive industry is estimated at 1,066,000,000. Mr. E. Everett, in his speech of 1830, rates our national income at 1,000,000,000 dollars.

Take the lowest of these estimates; suppose our national capital to be only 10,000,000,000, and our productive industry only 600,000,000 a year, can we not pay off a Bank debt of 109,000,000 in ten years?

In every year, the increase of loanable capital in the country, must exceed the amount of Bank debt it would be necessary to pay. Private credit would take the place of Bank credit. If there should be a greater demand for capital on loan than could be supplied out of the savings of our own people, capital would flow in abundantly from Europe.

If the notes should be withdrawn gradually, in the manner here proposed, there is not a solvent Bank, nor a solvent individual, in the country, that could not sustain the operation. Such are the energies and the resources of the American people, that it would seem practicable to accomplish the work in half the time we have mentioned. The sooner it is accomplished, the sooner will we be delivered from the evils of our present condition. If, however, ten years be thought too short a time for the work of reform, let it be extended through twenty years or through thirty years. The longest of these is but a short period in the life time of a nation.