A Short History of Paper Money and Banking

———

A brief exposition of the principles of Banking, wag all that the writer originally intended to give. In the first draft of the work, the historical sketch was part of a chapter. It has been extended to its present length, from a belief that a tolerably full account of incidents in the History of American Banking would be acceptable to the reader.

If additional illustrations of the nature of the system were wanted, they might be derived from its history in Great Britain. These, our limits will not permit us to introduce. We have, however, room for a sketch of the changes of opinion that have taken place in that country, in regard to paper money.

Mr. Joplin, in his History of the Currency Question, after collating different passages in the treatise on “The Wealth of Nations,” gives the following as a summary of the views of Adam Smith.

“1. That he would prefer the circulation between consumers or what may be termed the consumptive circulation, to be metallic: but that he thought it a greater advantage for the circulation between dealer and dealer, to be paper; admitting at the same time,

“2. That if Bankers were subjected to the obligation of an immediate and unconditional payment of their notes in coin on demand, as soon as presented, their trade might, with safety to the public, be rendered in all other respects perfectly free.

“3. That the amount of notes which the country required was an amount equal to the sum of metallic money which would circulate if there were no paper.

“4. That this amount could not be exceeded without producing an immediate demand for gold to be sent abroad previous to its passing into general circulation: by which, of course, no derangement of prices, from excess of issues, could at any time be produced: the evils of over-issues being confined to the Banks upon which the demand for gold would arise.

“5. That besides this, if the Banks confined their loans to real bills of exchange and real transactions, they would not be liable to any excess of issues whatever.”

“With these views of the working of our paper system, nothing,” says Mr. Joplin, “could be more reasonable than his (Smith’s) conclusions as to its value. It was evidently one from which much good might be derived, and no harm.”

What Adam Smith had immediately in view, was the Scotch system of Banking, which is carried on by unincorporated companies, each of the members of which is responsible, in his whole personal and real estate, for the whole amount of debts due by the company: and the English country system, which is carried on by private co-partnerships, the members of which enjoy no special privileges or exemptions. His views afford little or no support to the American Banking System. To a small note circulation he was a decided enemy. His judgment was, that country Banks should issue no notes of a less denomination than five pounds sterling, or twenty-four dollars Federal money: and that city Banks should issue no notes of a less denomination than ten pounds sterling, or forty-eight dollars Federal money. The whole tenor of his book is in decided opposition to the practice of conferring peculiar privileges or exemptions, on any men, or any bodies of men, and is, consequently, in decided opposition to a fundamental principle of the American Banking System.

The principles of Smith were generally received till the year 1797. The Bank of England then suspended specie payments, and permission was given to it and to the country bankers, to issue notes of as low a denomination as one pound. The country Banks were required to make payment in notes of the Bank of England: while the Bank of England itself was placed under no restraint whatever but the discretion of its directors.

This state of things necessarily drew the attention of political economists to the subject; and, as Bank of England paper did not, for some years, undergo any sensible depreciation, guineas began to be regarded as an unnecessary incumbrance. So strong a hold did this notion take in the minds of men, that when Bank notes passed in the market at a considerable discount, many writers affirmed that paper had not fallen, but that gold had risen in value.

Mr. Boyd, Lord King, and other Economists, showed the incorrectness of this opinion, and Mr. Ricardo placed its erroneousness in a strong point of view, in a pamphlet published in the latter part of the year 1809, entitled, “The high price of Bullion, a proof of the depreciation of Bank notes.” This work, Mr. Joplin avers “was the immediate cause, and formed the ground-work of the Report of the Bullion Committee.”

“The principles of this Committee, supported by a host of writers, became now,” says the historian, “the received opinions upon the subject, and they were as follows:

“They entirely agreed with Smith in the general principle, that if Banks were obliged to pay their notes in specie on demand, the trade might, in all other respects, be left perfectly free. They agreed with him, that the sum of paper in circulation ought not to exceed the sum of metallic money that would be in circulation if there were no paper: and they further agreed with him, that, if this amount of paper was not exceeded, no great demand for gold for exportation would ever arise: and that, if it were exceeded, a demand would arise for exportation, adequate to the excess. But in every other respect they differed from him, and laid down principles equally new and important.

“In the first place, they repudiated the principle that Banks could not issue to excess if they confined themselves to advancing money on real bills of exchange. This principle they proved totally incorrect.

“In the next, they denied that an excess of issues would be discovered by the merchant previously to the money’s entering into consumptive circulation, and be returned upon the Banks for gold: though they admitted that an excess of issues would produce a demand upon the Banks for gold for exportation. But this, they proved, would take place after the paper had been introduced into circulation, and had depreciated the value both of itself and of the gold in which it was payable; that gold, by this operation, becoming less valuable in England than in other countries, would be exported to other countries; that the excess of paper would be returned upon the Banks in demand for it, to be sent abroad until the excess was withdrawn; and that the value of both paper and gold would then rise to its previous level, and the exportation of gold cease. This doctrine negatived the idea of Smith, that an excess of issues did not find its way into consumptive circulation. It was contended, on the contrary, that prices must be raised above their proper level, before the exportation of gold could be brought about.

“Thus, two important principles of Smith’s which would be very much calculated to affect his views as to the value of a paper currency, were set aside: first, that the Banks had an easy rule by which to guard against excess; and next, that if they did issue to excess, no derangement of prices would be produced by it; that the injury would be felt by themselves, and not by the public.

“To this derangement of prices, however, which according to their views must precede an importation of gold, the Committee did not appear to attach much importance.

“In the third place, they contended, that the issues of the Bank of England regulated those of the country Banks. This theory was new, though appearing to be suggested and borne out by experience.”

When Mr. Joplin says that the principles of the Bullion Committee became the received opinions, we are to understand thereby that they became the opinions of a large part of the British nation. The Anti-Bullionists were so closely wedded to their favorite theory, that neither facts nor reasonings could separate them from it. Such was their influence, and such was the force of circumstances, that, though it had been determined that specie payments should be resumed one year after the close of the war, the Government delayed, for four or five years, to take the necessary measures for effecting this object.

In May 1821, the Bank of England regularly resumed the payment of gold on demand.

In the twenty-four years in which inconvertible paper was the circulating medium, many hundred millions had been added to the national debt, and the amount of private debts had been swelled immensely. The paying in specie of the interest of a national debt contracted in paper, and the discharging of private contracts in a currency of enhanced value, necessarily produced much embarrassment. No sooner, however, had the difficulties attendant on the resumption of specie payments been surmounted, than the Bank of England began to extend its issues. In 1824, it reduced the rate of discount from 5 to 4 per cent., and as the country Banks at the same time increased their circulation, such an appearance of prosperity was produced, as was unexampled in the annals of the kingdom.

This lasted till September 1825. Then, difficulties began, and in December there was a convulsion which threatened all interests with destruction.

“Such a panic,” says Mr. Joplin, “occurring in a period of profound peace, after a good harvest, and traceable to no other cause but defects in our system of Banking and Currency, rendered it, of course, incumbent on the ministers to bring forward measures to remedy, if possible, the evils which had been produced, and also to prevent the recurrence of such diasters in future.”

One of the principal measures they recommended was, the abolition of one and two pound notes; and, on this occasion, they, according to the British author just quoted, “adopted a mode of speaking of our currency different to any that had hitherto been adopted. When the withdrawal of the small notes was enacted in 1819, all the arguments were in favor of paper payable in gold. The Bullion Committee, whose views had been implicitly adopted, observed, that they fully agreed with Dr. Adam Smith, and all the most able writers and statesmen of this country, in considering a paper circulation constantly convertible into specie as one of the greatest practical improvements which can be made in the political and domestic economy of any State, and that such convertibility was a complete check against over issue.

“Nor had this doctrine ever been impugned by those who differed from the Bullion Committee in other respects. They, on the contrary, always contended, that paying in cash would not merely prevent over-issues, but would prevent enough being issued. It was too great a check upon issues. But in explaining the principles thus laid down in the letter to the Bank, the Ministers, now, for the first time, gave up this doctrine.”

Mr. Charles Grant stated, that “the great problem with respect to currency, is to discover that check whereby the evil we wish to avoid may be arrested before it takes place. The principle should be preventive rather than corrective. His honorable friend opposite (Mr. Smith) seemed to think, that the convertibility of paper into gold would operate as a sufficient check to arrest its progress; and in this opinion he was certainly supported by high authorities, amongst whom were some of the wisest men that composed the Bullion Committee. They all agreed upon the necessity of the convertibility of paper into gold, in order to establish a sound currency. The science of currency (for it deserved the name of a science) was every day acquiring additional light; in fact, it was now in a state of experiment. It appeared to him that those who supported the Bullion Report were led to rely too exclusively on this check, not merely to correct the evil when it does take place, but to operate as a preventive, by which to guard against the extension of it beyond a certain point. There was no doubt of the check; but it may be so tardy in its progress as to produce the evil itself: because, it is a check that operates not by necessity, but by the discretion and judgment of those by whom the paper is circulated.

“It was clear from what had occurred, that the check provided by the convertibility of notes into gold, operated so tardily, as to be inadequate to avert the evil, and it ought to be the leading principle in every sound currency, to provide the means of arresting the evil before it arrives at its height.”

Lord Liverpool took a similar view of the subject, and the Chancellor of the Exchequer, for the first time, impugned the doctrine of the regulating power of the Bank of England. He observed, “that by an investigation into the different issues of different years, it would be found, that the issues of the Bank of England had no relative connection with the issues of the country Banks, it happening in several instances, that, when the Bank of England issues had increased, the country note issues had diminished, and vice versa.”

This was also maintained by Lord Liverpool, who joined with the Chancellor of the Exchequer and with Mr.Huskisson, in descanting on the merits of a metallic medium. The latter observed, that, “It was the natural course, that, in such a fluctuating state of our currency, all classes of society must, in their turn, be afflicted by it, and, therefore, the sooner we get rid of that fluctuation, and returned to a sound, and healthy, and permanent, circulating medium, the better for the community at large. If they wished to prove the value of a steady and unchangeable currency, they had it in the history of France; that country had been twice invaded by a foreign army, her capital had been twice taken possession of, and she was obliged to pay large sums to foreign countries; but they had a steady metallic currency, and however such visitations might have affected the great—however the extensive contractor might have been injured or ruined, the body of the population remained unoppressed. The storm might have crushed the forest tree, but it passed over without injuring the humble reed. This was to be attributed to the permanent footing upon which the currency of that country had been established.”

In conformity with these views, an act was passed to prohibit, after the —— day of —— 1829, the issue of all notes of a less denomination than five pounds sterling. In 1828, a vigorous effort was made to repeal the law, but it was steadfastly and successfully resisted.

In a debate on the subject on the 3d of July, 1828, the Duke of Wellington said, “The measure of 1826 was not founded on any theory, but on experience which the few last years had confirmed. That experience had proved the fallacy of a theory which stated that a paper currency was perfectly safe as long as it was convertible into gold and silver. Experience during the three last years had proved this theory not to be true. It had likewise proved another theory not true—the theory that one pound notes and sovereigns could circulate together.”

In the same debate Lord King remarked, that “those persons who considered paper money as an excellent thing to be established in a country, he was disposed to view as heretics. He had no hesitation in saying that the superstition attached to paper money was idolatrous in the highest degree. He looked upon it as the most dangerous heresy of all heresies.”

The opinions of such men as Mr. Huskisson, Mr. Grant, Lord King, Lord Liverpool, and the Duke of Wellington, are, on such a subject as this, entitled to the respectful attention of every candid American. In their country, paper money Banking has been known longer than in ours. Every thing that can be said in favor of convertible paper, has been said in the various publications that have issued from the British press. These statesmen were familiar with all the arguments usually adduced in support of the system. They had ample opportunities of observing its practical effects.

If, however, we are disposed to disregard the result of their experience, let us examine the system for ourselves.

If paper money Banking requires only new restrictions to prevent its producing evil, the nature and number of those restrictions cannot be known, till we know all the evils it has produced.

If, as some seem to think, the system is to be perpetual, the effect it has on society, is a rational subject of inquiry. Such an inquiry, if faithfully made, will prevent us from ascribing to other causes such evils as have their origin in Banking, and thereby prevent us from increasing those evils by applying improper remedies.