A Short History of Paper Money and Banking

CHAPTER XXVII. Of the Fiscal Concerns of the Union.

In a report to the Senate, by the Committee of Finance, made March 29th, 1830, it is said—

“The Government receives its revenue from—

	343	Custom Houses,
	42	Land Offices,
	8400	Post Offices,
	134	Receivers of Internal Revenue.
	37	Marshals,
	33	Clerks of Courts.

“These, with other receiving officers which need not be specified, compose an aggregate of more than 9000 persons, dispersed through the whole of the Union, who collect the public revenue. From these persons the Government has, for the ten years preceding the 1st of January, 1830, received $230,068,855 17. This sum has been collected in every section of this widely extended country. It has been disbursed at other points, many thousand miles distant from the places where it was collected; and yet it has been so collected and distributed, without the loss, as far as the Committee can learn, of a single dollar.”

The most difficult point in the business of finance, is to get possession of money. If this point is attained, the safe-keeping of the money, the transferring of it from one part of the country to another, and the paying it away, are easy undertakings.

If “not a dollar has been lost,” it has not been because the present system contains any extraordinary guards against malversation. The collectors at our customhouses have the whole amount of money received by them under their entire control, till it is, at stated times, transferred to the credit of the Treasury Department. Under a different system, all the public officers at each particular point might be made checks on one another.

With a sub-treasury office in each State, the safe-keeping and disbursing of the public funds could be effected without any difficulty; and the expense of each sub-treasury office need not exceed ten thousand dollars per annum.

If it were necessary occasionally to carry silver from one part of the country to another, the Government could do it as easily and cheaply as individuals. The whole amount it would be necessary to transport, would not probably exceed four or five millions a year, nor the cost go beyond one per cent. As the principal part of the United States’ revenue is collected in those sections of the country which have usually the rate of exchange in their favor, what the Government would gain by the sale of bills of exchange in the West and South, on Boston, New York, Philadelphia, and Baltimore, would probably exceed what it would be forced to pay for the transportation of specie.

There is no novelty in this. It is the system of all policed nations except our own. In England, the Bank is merely auxiliary to the Exchequer and the Treasury. The revenue collected at Liverpool, is, or was a few years since, remitted to London through the agency of a private Banker.

To incorporate a Bank with a capital of ten millions or of thirty-five millions, to endow that corporation with privileges which individuals do not possess, and to make its paper receivable in payment of dues to Government, is a measure so wide from the proposed end, that it cannot be considered “as necessary and proper,” or, if the phrase be preferred, “as natural and appropriate.” It is difficult to believe that it would have been even so much as thought of, if the measure had not in itself been calculated to promote certain private interests. The natural and appropriate way of keeping the public funds, is in the Treasury and in sub-treasury offices. The natural and appropriate way of transferring them from point to point, is by bills of exchange, and the occasional transportation of specie.

Neither is the establishment of a United States paper-money incorporated Bank, the “necessary and proper,” or “natural and appropriate” way of correcting the evils occasioned by the State Banks. A National Bank, resting on the same principles as the State Banks, must produce similar evils. It must “contract” and “expand” as well as they.

If Congress should, from excessive caution, or some less commendable motive, delay the passage of the necessary laws for prohibiting the issue of Bank notes, the “necessary and proper” or “natural and appropriate” way of regulating the State Banks, would be by declaring that nothing but gold and silver should be received in payment of dues to the Government. The State Banks would then be obliged to provide a sufficient fund of specie to meet the demands of the merchants having payments to make to Government. This would force them to diminish the amount of notes in circulation. The Government receiving and paying nothing but gold and silver, the people generally would begin to distinguish between paper and specie—between cash and credit. Simple as the measure is, it would double the amount of metallic money in the country, and prevent, in a great degree, fluctuations of currency, and oscillations of credit, by taking away one of the chief causes of the instability of Bank medium.

The establishing of a paper-money incorporated Bank, is not the “necessary and proper” or “natural and appropriate” way of enabling Government to borrow when borrowing is advisable. A Bank may, when instituted, lend to Government its whole capital, or so much, at least, as is not required for supporting its credit and circulation: but it is not often that it can, after it has been sometime in operation, make any great loan to Government, without either curtailing mercantile accommodations, or issuing an excess of paper. Nearly all the great “ expansions” and “contractions” that have occurred in both England and the United States, can be traced to attempts to convert Banks into fiscal machines. If the operations of Government could be completely separated from those of the Banks, the system would be shorn of half its evils. If Government would neither deposit the public funds in the Banks, nor borrow money from the Banks; and if it would in no case either receive Bank notes or pay away Bank notes, the Banks would become mere commercial institutions, and their credit and their power be brought nearer to a level with those of private merchants.

The “necessary and proper” or “natural and appropriate” way of placing the financial concerns of the country on such a basis as will enable us to provide for all exigencies, is to make gold and silver coins the exclusive money of the country. We shall then be prepared for either peace or war.

To depend on the Banks in time of war, after the experience of both England and the United States, would be the height of infatuation. The impression produced on the minds of men by the suspension of specie payments, is so fresh, that, on a new declaration of war, it is probable great part of the deposits would be withdrawn. If the Banks should escape this evil, the landing of a hostile force of but a few thousand men on any part of the coast, would create “a run” which would compel most of them to suspend payment. If Government should, to forward its financial schemes, sanction or connive at a suspension of specie payments, it would be instrumental in producing such evils as we have suffered in past years.

A war imposes on Government the necessity of expending the greater portion of its revenues in a section of country distant from that in which it collects it. The payment of the war taxes of a single year, would deprive great part of the Union of its specie. The sources of foreign supply would be cut off, and much of the specie which flowed from the interior to the frontiers, would be exported. It would not return in sufficient quantities, or sufficiently early to meet the wants of either the people or the Government.

A vigorous war of but two years continuance, in which our foreign commerce would be interrupted, must produce one of two results. It must either compel the Banks to suspend specie payments, and thus produce evils which no pen can adequately describe; or else force them to curtail mercantile accommodations, and thus spread ruin through the community. To sustain the credit of Bank medium, it would be necessary to reduce it to one-third or one-fourth of its present amount: and as it would be impossible in a state of war, immediately to obtain a sufficient supply of gold and silver coin, the Government and the people would suffer all the evils of an insufficient circulating medium.

We have profited in some respects by the experience of the last war. We have built ships, constructed fortifications, and collected military stores. But “money is the sinews of war.” And it must be real money. Paper money will not then answer. It is not necessary that the real money should be in the coffers of Government. It is enough that it is in the pockets of the people.

Let Bank notes be withdrawn, and such an accumulation of gold and silver coin will be made by individuals, that in no possible exigency will there be a real scarcity of money. This is evident from the condition of certain countries in which paper money is unknown. In Flanders, for example, every farmer has a little purse of gold or silver—small in proportion to his property, but making the aggregate throughout the country very considerable. Nothing is lost by this practice. It is impossible to keep the whole wealth of a country in constant circulation. If a man’s whole stock consists of but two suits of clothes, he cannot wear them both at the same time. It is of little moment, as regards individuals, whether their reserved stock be in money or in those things which money can procure. In a national point of view nothing is lost by this custom. It ensures the punctual performance of contracts. No man has to call twice on a farmer in Flanders, for the payment of a debt. Whatever may be the vicissitudes of war or of commerce, there is never in that country a scarcity of the tool of all trades.

We have that amount of metallic money in the United States which is barely sufficient, in the most favorable state of things, for daily exchanges, and which would not answer even in the most favorable state of things, if we had not various modes of barter, and different credit contrivances. As much time is lost every year, in “dunning for debts,” as would, if properly employed, purchase some millions of metallic medium. Let the natural order of things be restored, and a sufficiency of metallic money will be collected, to enable the country to bear transitions from peace to war, and to answer all the demands of commerce, both ordinary and extraordinary. As it is the custom of all prudent families in rural districts, to have on hand a greater quantity of flour and other necessaries, than is required for the use of the twenty-four hours, so it will become the custom for each prudent family to have a little money in reserve. Out of this stock, the war taxes will be paid, and before the original stock is completely exhausted, a portion of it will come back to them in the regular course of trade.

Few people are more able than those of the United States to contribute what is necessary for the defence of their country. Few people—if we had a proper money system, would be more willing. Ask the farmer, if, in a war undertaken in a just and righteous cause, he would not be willing to contribute a certain number of bushels of wheat, to vindicate the honor of the nation or secure its safety. Ask the shoemaker, if he would not be willing to contribute a certain number of pairs of shoes. Ask the day laborer, if he would not be willing, in such a contingency, to labor a certain number of days on the fortifications. Now, what a nation actually consumes in the course of a war, is labor and the products of labor: but the taxes cannot be conveniently collected in kind, and to collect them in money is impossible, for the people have it not to give.

Let those obstacles be removed which prevent our acquiring such a stock of metallic money as is adapted to varying exigencies, and in times of hostilities, neither productive industry nor commercial credit will be affected more than is necessary by the incidents of war. In this condition of things, the Government could easily raise considerable sums by taxation. If it chose to borrow, the negotiation of its loans would not, as in the last war, derange the whole train of mercantile operations. Simply by collecting taxes enough to pay the annual interest, it could borrow to any desirable extent. If the loanable capital of our own country were not sufficient to meet its wants, it would have the market of the world from which to supply the deficiency.

But, let the present system continue, and, in a state of war, the Government must get into financial embarrassments, in attempting to extricate itself from which it will, as in the last war, involve thousands in ruin.