A Short History of Paper Money and Banking

William M. Gouge and the Formation of Orthodox American Monetary Policy

Few areas in American history have undergone such intensive study in recent years as the Jacksonian era. A major subject of controversy in that period is monetary and banking policy. It began with President Jackson’s successful veto of the bill for rechartering the embryonic central bank, the Second Bank of the United States, in 1832. The subsequent struggle on both the federal and state levels rocked the nation intermittently for a decade. The ablest writer on the orthodox Jacksonian hard-money side was William M. Gouge (1796-1863); the bible of the movement was his A Short History of Paper Money and Banking in the United States, . . . to which is Prefixed an Inquiry into the Principles of the System (1833).1

It seems to have been the first American economics treatise to win an international reputation. An abridged version was published in the influential Brussels journal, La Revue Universelle; in England the second part, the history part, was brought out by the leading political journalist, the radical William Cobbett. The foremost popularizer of the dominant British classical school, J. R. McCulloch, commended the treatise for its detailed history of American banking. The praise which it received at home as well as abroad was in good part due to Gouge’s careful research. For this he spent over two years at the library of the American Philosophical Society, Philadelphia, a rough counterpart of the famed British Museum. Gouge supplemented this by correspondence with knowledgeable persons in various states. Such was the level of the work that it is still a primary source for information on the history and organization of American banking, especially for the first third of the nineteenth century, a period when the veil of secrecy surrounding banking was even tighter than in other fields.

Gouge was an agile writer, shy in personal contact and adverse to speech making, but possessed of a persuasive pen, steeped at times in wit and satire. He “was one of the most thorough students of our early banking [including the security and money markets] and also one of its keenest and most influential critics.”2

To furnish perspective on his monetary and banking views, it seems desirable to provide a short biographical sketch and a statement of his general economic philosophy. The son of an apothecary, he was born and raised in Philadelphia. Though he was to spend most of his mature life in Washington, he always preferred large cities, especially New York.3

His career consisted largely of his activities as a financial journalist and as an employee of the United States Treasury; he pursued these occupations simultaneously for a good part of his life. He began as a journalist and first achieved prominence in Philadelphia while serving as co-publisher and editor (with Stephenson Smith) of the Philadelphia Gazette and City Advertiser from 1823 to 1831. He devoted the newspaper chiefly to monetary and banking reforms, advocating primarily what became a part of the Jacksonian creed, the prohibition of small bank notes, as a first step in the elimination of all bank notes. At the same time he helped prepare a so-called “workingmen’s” memorial to the Pennsylvania legislature which sought to prohibit the chartering or rechartering of banks with the corporate power of limited liability.4 But this was one of those periods when there was relatively little public interest in currency and banking questions. Gouge’s newspaper constantly lost subscribers and he was forced to give up what “had promised to be one of the most lucrative newspaper establishments in the country.”5

Ten years later, he again attempted the role of editor and publisher; he started the bi-weekly The Journal of Banking, but the result was the same. After a year he was forced by the loss of subscriptions to suspend publication, complaining of the public’s antipathy to economic abstractions, especially “the science of currency.” He pointed to the fate of The Journal of Banking as further evidence that “no journal of political economy or statistics, in either Europe or America ... has ever repaid expenses.”6

Gouge’s journalist activities were not limited to his own ventures; from the 1830’s down to the Civil War he was a valued contributor to and adviser of such influential financial and economic journals as Hunt’s Merchants’ Magazine and The Bankers’ Magazine and Statistical Register, and such leading Democratic party organs as the Washington Globe and The United States Magazine and Democratic Review.

From about 1834 to March 1862, Gouge was with the Department of the Treasury except for relatively short periods when the Democrats did not occupy the presidency. Even when the Whigs and their successors were in power, he managed to retain his post for a part of the time.7 He began, as he put it, as a “mere accountant and copyist,” but was soon charged with the duties of what may be called ‘‘the statistical and politico-economical clerk” of the bureau that served as the immediate staff of the Secretary of the Treasury.8 In this capacity he should be credited with services of value not only to government but also to the growth of economic science and especially monetary and banking policy. As he described it, his was the task of collecting and arranging the materials that went into the detailed statement of the condition of the banks throughout the Union which the Secretary of the Treasury laid before Congress each year.9 He used his skills as accountant and statistician to improve the collection and systematization of monetary and banking data that Treasury, Congress and the business world used in making decisions.10

Perhaps more important for our purposes was his involvement in policy making. He served as an economic adviser to secretaries of the treasury in Democratic administrations and such outstanding Jacksonian leaders in the monetary controversies as Senator Thomas Hart Benton of Missouri and Benjamin F. Butler, Attorney General in Jackson’s second administration. Occasionally Gouge worked directly with President Martin Van Buren.

His general economic philosophy was in the Jefferson-Jackson laissez faire tradition. This view he showed more formally in his adherence to Adam Smith and “the axioms of political economy’’ of the British classical school typified by David Ricardo and its continental counterpart led by Jean-Baptiste Say.11 Gouge, like the classical economists, held that the theory of value was basic in any economic discussion. The laws of supply and demand were all-powerful in the determination of value. For natural value, cost of production was the determining condition of supply, and back of demand was the adaptation of the goods to the wants and desires of the people. “The market value ... is in the compound ratio of their utility and of their scarcity.”12 Thus the prices of goods and all factors of production would be “much better regulated by free competition than ... by governmental enactments.”13

Business corporations, especially banks, possessed of the privilege of limited liability and other perquisites, were “incompatible with the equality of rights and unfavorable to the progress of national wealth.” In the absence of “the Argus eyes of private interest ... their affairs are much more carelessly and ... expensively conducted than those of individuals.”14

He questioned the desirability of laws fixing a maximum rate of interest; here he differed from his master, Adam Smith, and followed instead Jeremy Bentham’s Defence of Usury (1787).15 “Loanable capital in the form of money, varies in value ... [Consequently] it is as absurd to attempt to fix the rent or interest of money ... as it would be to fix the rent of houses or lands that are bought with money.” Furthermore, if banks were free to raise the interest on loanable capital, as its value in the market increased, this action would “put the whole community on their guard, and many a fever of wild speculation would be checked” at the very start.16 Similarly governments might issue bonds at a heavy discount but they must redeem them at their nominal price lest the affected states lose their credit.

The claims of the honest capitalist, Gouge insisted, were just as sacred as those of the honest laborer. His theory of wages was the traditional wages-fund doctrine: “Every increase of capital increasing the fund out of which wages would be paid, would increase the reward of the laborer.” Gouge chastised the lazy and improvident for neglecting to accumulate a capital and thus making themselves independent of “others for means of both subsistence and employment.”17

On the other hand, on matters such as the safety of steamboat passengers, he was a strong supporter of the policy of regulation which President Jackson had promoted. Thus in reporting in 1854 to the Secretary of the Treasury on the workings of the steamboat inspection law, he said that so many disasters occurred from steam navigation unregulated by law that passengers had to look to the government for protection.

On matters of central concern to him, money and banking, Gouge argued that the precious metals—gold and silver—were chosen to be money, because their particular qualities “fitted them to be standards and measures of value, and to serve, when in the shape of coin, the purposes of a circulating medium.” They were the most convenient instruments of valuation, especially since they varied less than all other goods “from changes in the relation of supply and demand.”18 At the same time, he pointed out that bank deposits must be viewed as part of the circulating media, that they might be created by the process of bank loans, and that they had exactly the same effects on prices as bank notes.19

Gouge deprecated any deviation from a metallic currency. He contended in the treatise that the present mixed system of currency, of specie and bank notes redeemable on demand in specie, was the primary source of economic evils, especially inflation and subsequent severe depression. Anything that excites the spirit of speculation encourages a tendency to increase the amount of bank issues. With the increase of paper money, prices rise, though in uneven fashion, until eventually the prices of some goods substantially exceed their prices abroad. The resulting adverse balance of trade brings a halt in the rise of prices. Since the foreign sellers will not accept the paper money, importers demand specie from banks. The bankers in turn start calling in loans and refuse extensions and their debtors in turn press their own debtors in what seems an endless chain. The contraction causes a rapid, sharp fall of prices and goods cannot be sold except at a heavy loss. Multitudes become bankrupt but as prices decline, imports fall and gold eventually returns. The confidence of the banks is revived and they begin to issue paper money again, and the circle of expansion and contraction is on. The effect of the restriction of the money supply under a banknote currency was much worse than under a specie standard because of the multiple contraction that results in the “pressure” on the community. Gouge estimated it as fourfold. Not least of the effects of the contraction is the substantial unemployment. Here he brought into play what is called the income approach: “as one man is thrown out of employment, his effective demand for the product of his neighbor’s labor is diminished.... If twenty clerks are deprived of employment, the shoemaker may find it necessary to dismiss one of his assistants ... and so of all other trades. ”20 In more modern terminology: “as contraction of the currency, by diminishing purchasing power, spoils the market, one employer after another must release his workers. The discharge of a considerable number of employees, depriving them of their incomes, prevents their purchasing as freely as usual, thus tending to diminish production in other lines and further to increase unemployment. A progressive deterioration of the market is introduced, and with it goes like slackening of production.”21

Gouge insisted that this must not be interpreted as giving approval to the heretical doctrine that general overproduction was the cause of the crisis: “If the real wants of the community, and not their ability to pay, be considered, it will not perhaps be found that any one useful trade or profession has too many members.... But, in one sense, all businesses may be said to be ‘overdone’ since all businesses are by this system rendered unprofitable to those who are engaged in them.” Gouge concluded that any good done by corporate banks is overbalanced by “their continual alterations of the measures of value, by the uncertainty they give to trade, and by the advantages they confer on some men over others.”22

He maintained that the various restrictions on banks that were proposed would not be effective. Take for example, what was then becoming the orthodox view of the proper kind of bank loans; namely, that, if banks would not discount “accommodation notes” but only short term business paper, real commercial bills, they would not overissue.23 But the discounting of such bills, said Gouge, might cause inflation because “the same lot of goods might be sold to a dozen persons, and each might give a note, and each of these twelve notes might be discounted at bank.” Furthermore, the most stringent legislation could not restrict banks to commercial bills, “if this paper did not afford full employment to all their ‘capital’ and all their ‘credit.’” He expresses sympathy with the proposal to limit bank dividends on the ground that it “would remove many inducements to over-banking,” but felt that such a measure would not be adequate.24

He ruled out rechartering the Bank of the United States as a regulator of the state banks not only on constitutional grounds but also on the ground that as an incorporated paper money bank it would produce as in the past the same evils as the state banks. As a profit making institution, the central bank could hardly be expected to act to restrain the inflationary tendency of state banks, but would itself expand and contract as they did.

As an ideal remedy Gouge proposed prohibition of all incorporated paper money banks; that is, to eliminate their privileges of limited liability and note issue. In their place he would have banks subject to unlimited liability, lending only their own capital plus savings deposits (time deposits) and maintaining a hundred per cent specie reserve against demand deposits. In this sense, banking, like all other businesses, should be free.25

Gouge expected that private banks would rise up to receive deposits, discount promissory notes and deal in exchange. “The bankers would be men of great wealth, for it is in lending money that men of large fortune can employ their capitals with most profit and convenience.”26 Their competition would result in more favorable terms to borrowers. They should and would allow interest on savings deposits. At the same time, these banks should impose a small charge in proportion to the amount of service they rendered customers “in the collecting of bills, the receipt of [demand] deposits, or the payment of drafts. In this way, they who derive advantage from the banks would pay their necessary expenses. Now, these expenses are paid by a tax levied in an indirect way, on the whole community.”27

Gouge granted that the sudden ending of the old banking system, especially the prohibition of all bank notes, “would be ruinous” to the economy. The answer was to begin with small notes and proceed gradually to those of the highest denomination.28 This suggestion became a basic monetary policy for President Jackson and his followers, and it enjoyed some success for a time as regards denominations under $5.

Another of Gouge’s proposals which had much greater success and one with which his name is most closely identified was the Independent Treasury, or Sub-Treasury System. After President Jackson’s veto of the bill for rechartering the Second Bank of the United States there arose the question of the future handling of the fiscal concerns of the federal government; that is, the holding, receiving and disbursing of federal funds. There was a discussion over whether this should be largely performed by selected state banks or exclusively by the government. Gouge had argued in A Short History for the latter; government fiscal operations would be handled through the treasury with the help of sub-treasuries; and only specie would be used. He had explained that:

If the state banks were made the depositories of the public funds, and if their notes were made receivable in payment of duties, the evils of the [paper money] system would be increased. If the Government should, after the expiration of the present charter of the United States Bank [in 1836], resolutely refuse to receive anything but gold and silver in payment of debts, and also refuse to employ any bank as an agent in its fiscal operations, the evils of the system would be greatly diminished.29

As the foremost work on the history of American banking theory summarized his basic doctrine:

Gouge ... desired a “constitutional treasury system”, as he called it, for the reason that it would abolish all connection between the banks and the government. If the government deposited its balances in the banks, the latter would then have larger reserves upon the basis of which they might expand; if the government allowed itself the privilege of borrowing from the banks, such a practice would surely lead to inflation; and even if the government merely accepted bank notes in payment of taxes, the result would be inflationary. Under the sub treasury system, however, there was a continual flow of gold between the banks and the treasury, and this fact served as a constant check on the banks, “not as does the foreign demand at uncertain intervals of months and years, but daily, nay, hourly.” The only rational objection, he thought, was that even so, the check was not strong enough.

[Most important of all] ... a larger quantity of specie would be in circulation, thus bringing the money supply a step nearer that of a hard money system.... It was his contention that, if the government received and paid out only coin, additional specie would be imported, and thus the supply of specie in circulation would be increased and the volume of bank obligations decreased. The increase of specie, he claimed, would have the further advantage of producing an increased supply of reserve money available to the banks upon the contraction of their loans. He pointed to the advantage of the “constitutional treasury system” in furnishing an improved means of interregional transfer of funds. Finally, he contended that in the case of a large payment of gold by the government there would be no disturbance to business, whereas, if the banks were acting as the fiscal agents of the government, such a payment would result first in inflation and later in contraction, with all its unfortunate consequences.30

Gouge showed imagination when he described the government as “the greatest capitalist and the greatest dealer in the country” because of the immense volume of transactions, especially those growing out of land sales and customs duties, the main sources of its income; and proceeded to say “Let such a capitalist and such a dealer decline receiving and paying bank paper,” and the issues of the banks would be substantially reduced.31

President Jackson at first went contrary to Gouge’s views by ordering Secretary of the Treasury Roger B. Taney in October 1833 to begin the process of removing the deposits from the Bank of the United States to selected state institutions. But Jackson and some of his cabinet had grave doubts as to whether this should be the permanent policy. So much so that, when Gouge entered the Treasury, Levi Woodbury, the new secretary, had him prepare “A Memoir on the Expediency of Establishing Sub-Treasury Offices.”32 In the “Memoir”, dated April 1835, he outlined not only the argument “in the abstract ” but also the details of its practical operation and cost.

No action was then taken on the proposal, according to Gouge, because men supporting the idea of a league of state banks to perform the role of fiscal agent had the ear of the administration and especially Woodbury. But when a money panic began in May 1837 and banks suspended specie payments, Gouge, immediately and without informing the administration, published an elaborated version of the “Memoir” under the title, An Inquiry into the Expediency of Dispensing with Bank Agency and Bank Paper in the Fiscal Concerns of the United States. He archly explained to Secretary Woodbury that “I did not mention to you, or to any other member of the cabinet, my intention of making this publication, because I thought that from my peculiar position, it might be regarded by some as a feeler put forth by the administration, and I wished no person but myself to be compromitted by it, in case it should not prove acceptable to the public.”33

President Van Buren made the Independent Treasury system the major issue for the special session of Congress in September 1837. After a three year fight and a temporary split in the party, it became law in 1840. Gouge, who during the battle was saluted by the supporters of the measure as a master mind and by opponents as the evil genius, began installing the system. The law was repealed after Van Buren was defeated for re-election at the end of 1840, but in 1846 it began a long career as the major regulator of the monetary and banking system of the country until the establishment of the Federal Reserve System in 1914.

Gouge not only established the system but he also was on the alert to close loopholes. Thus in 1854 he proposed, and Secretary of the Treasury James G. Guthrie adopted, a scheme for reducing transfers of specie to a minimum without making the drafts a currency. These could be obtained at any sub-treasury on deposit of the specie at the issuing office, but they had to be drawn on a specified sub-treasury in order “to prevent their passing from hand to hand as currency. For with the restrictions as to the place of redemption, if they circulated at-all, they would remain in the neighborhood of the sub-treasury at which they were payable.”34

The sub-treasury system won such general approval that ex-president Martin Van Buren could state in the late 1850’s that it was the only clear case of a public measure or act “entirely acceptable to all sides.”35 It gained this strong support from its practical success in maintaining the credit of the government, especially during the panic of 1857. As President Buchanan noted in his annual message of December 7, 1857, “Thanks to the Independent Treasury, the Government has not suspended [specie] payments, as it was compelled to do by the failure of the banks in 1837.” By this measure as well as by his writings, Gouge played a large role in solidifying if not in rendering more rigid the tradition of hard money that continued to dominate American monetary and banking policy down to World War I, despite the modifications that were made in the original legislation.36

American historians have until very recently widely held that Gouge was the militant champion of the downtrodden western farmer or of the exploited wage earner of the urban east, or of both. Interestingly, he refuted that view in the 1840’s in The Journal of Banking. After noting a number of leading business men who supported hard money, he exclaimed that “the friends of sound currency and sound credit have ... borne too long in silence the reproach of being ‘a miserable set of loco-focos, disorganizes, radicals, levellers, destructives, agrarians, infidels, and atheists’.” The substantial number of “large (solid) capitalists” and professional men on the subscription list should dispose of the diatribe that “dissatisfaction with the present banking system is confined to those whose own hard fortune has made life bitter to them.”37

He also noted that his essay “The True Principles of Commercial Banking” (The United States Magazine and Democratic Review, May 1838) “was much commended by many commercial men, and others, who, from their position and previous studies, were well qualified to judge of its merits and defects. Among others ... a Director of the Bank of England was so pleased with it, that he sent to this country for copies of all the writings of [its] author.”38

Gouge conceived of himself as an “intellectual,” belonging to the growing class of “disinterested political economists.”39 To achieve necessary banking reform, he realized that more was required than the arguments of a “disinterested political economist.” “It is partly by assistance ... coming from men who would as willingly, if their political ambitions could thereby be gratified, ... aid the banks as oppose them, that I hope for reform.... [I]t is remarked by a theological writer that the wicked are frequently the instruments of doing more good than the righteous, inasmuch as worldly ambition in the minds of the first is generally a much stronger passion than disinterested benevolence in the minds of the latter, and, therefore, when the worldly ambitious happen to seize hold on a right measure, they push it with far more energy than would be done by those actuated solely by desires to promote the public good.”

He felt that the church had been and could be a powerful force for reform, but the ministers were so split on bank reform that not too much dependence should be placed on the church on this question. Suppose people’s minds will not “yield to the disinterested effort of political economists, to the more selfish efforts of ambitious politicians, or even the heavy artillery of the church. What then? We must do what we can to check the evils we cannot cure. To preserve the balance between evil and good in the world, is all that, according to some writers, can be done. If moral effort ceases, evil will quickly predominate.”40

The obituary of Gouge which appeared in that conservative journal, The Bankers’ Magazine, summed up the dominant opinion on the man and his book: He was “exceedingly well informed on all questions of finance” which he discussed with considerable skill and his book was “a very able and clear exposition of the principles of banking and of the mistakes made by our American banking institutions.”41

JOSEPH DORFMAN

Columbia University
October 1967

___________

42 The edition which is reprinted below is the first edition. Subsequent editions contained only minor changes. The last appeared in 1841-1842 as supplements to his bi-weekly The Journal of Banking.

43 Harry E. Miller, Banking Theories in the United States Before 1860 (Cambridge, Mass.: Harvard University Press, 1927) p. 86.

44 While inspector of customs in New York in 1843, Gouge was reluctant to be transferred to Washington on the ground that New York “affords a greater variety of objects with which to divert the mind.” (Gouge to J. C. Spencer, October 25, 1843, National Archives, Treasury.)

45 For a discussion of this memorial, see Joseph Dorfman, “The Jacksonian Wage Earner Thesis,” 1949, reprinted in The Economic Mind in American Civilization (1946; reprinted by Augustus M. Kelley • Publishers, 1966) II, appendix.

46 Gouge to F. P. Blair, August 17, 1831, Blair Papers, Princeton University Library. He explained that the Gazette had not attacked that “terrific institution,” the Second Bank of the United States, because he would soon have been without adequate funds just to print the paper.

47 “Notice,” The Journal of Banking, June 22, 1842, p. 404.

48 Gouge was dismissed in April 1841 when the Whigs came to power, but he came back in 1843. In April 1851, after the Whigs had won the presidency, Gouge was again forced out and finally on March 3, 1862, after the Republicans had been in office for a year, he was dismissed. At the time his salary was $1,600 a year.

49 Gouge to President Van Buren, July 17, 1840, Van Buren Papers, Library of Congress; Gouge to James G. Guthrie, March 10, 1853, National Archives, Treasury.

50 Even when out of government service, he continued to collect data in part with the help of correspondents such as his fellow collector of statistics and future Democratic party candidate for the presidency, Samuel J. Tilden.

51 This function is now largely performed by the Comptroller of the Currency.

52 His favorite was always Adam Smith. He complained that The Wealth of Nations was seldom reprinted in the United States whereas English translations of Say’s treatise were reprinted many times; “but this is chiefly owing to its having been adopted as a textbook in the colleges, and to a study of it being requisite to enable young men to take their degrees.” (“Political Economy,” The Journal of Banking, February 2, 1842, p. 242).

53 Below, Part I, pp. 10, 11.

Gouge commented on what came to be called marginal utility analysis: “Value is, according to some approved writers, in its ultimate analysis, ‘a judgement of the mind.’ It would carry us too far into the regions of metaphysics to show how they make this out.” (“The Standard of Value,” The Journal of Banking, March 16, 1842, p. 290).

54 “Remarks,” The Journal of Banking, December 22, 1841, p. 196.

55 Below, Part I, p. 41.

56 Gouge commented humorously that the tract “was free from those peculiarities of phraseology which render other of Bentham’s works sealed books to the great mass of readers.” (“Bentham on Usury,” The Journal of Banking, April 18, 1841, p. 52).

57 “Banking as It Ought to Be,” The United States Magazine and Democratic Review, April 1843, p. 427.

58 Below, Part I, pp. 91, 132.

59 Below, Part I, p. 10.

60 “He who has deposited money in the bank, and he to whom it has been loaned, appear as competitors in the same market.... It is the same sum of money.... But there are two credits for this money in the bank, and the credit is equivalent to cash, both to him who has deposited the money and him to whom it has been lent.” (Below, Part I, p. 23.)

In 1859 Gouge argued that “dullness of business complained of at the beginning of the present year in some parts of the country” was due to the fact that “many chose to let deposits lie inactive rather than employ them in enterprises in regard to which they could come to no satisfactory conclusion.” (“The Banks of the United States,” The Bankers’ Magazine and Statistical Register, July 1859, p. 5.)

61 Below, Part I, p. 27.

62 Miller, Banking Theories in the United States Before I860, pp. 203-204.

63 Below, Part I, pp. 27, 49.

64 A good statement of the theory, later called the “realbills” doctrine, is as follows: “Restriction of bank earning assets to real bills of exchange will automatically limit, in the most desirable manner, the quantity of bank liabilities; it will cause them to vary in quantity in accordance with the ‘needs of business’ and it will mean that the bank’s assets will be of such a nature that they can be turned into cash on short notice and thus place the bank in a position to meet unlooked for calls for cash.” [Lloyd W. Mints, A History of Banking Theory in Great Britain and the United States (Chicago: University of Chicago Press, 1945) p. 29.]

65 Below, Part I, pp. 50, 51, 52.

66 Historians of American banking theory have generally held that Gouge in the late 1830’s began to look favorably on banks of issue if they followed the real bills doctrine. This view was based on certain ambiguous statements in his “Commercial Banking,” (Hunt’s Merchants’ Magazine, April 1843). Interestingly, the same article caused a fellow journalist and opponent of banks of issue to express regret that Gouge sanctioned such banks. Gouge in a private letter to a friend said that he had been misunderstood. “I intended it as an introduction to other articles in which it was my desire to show that banks of issue cannot be so managed as not to produce evil. In The [United States Magazine and] Democratic Review for April, I have published an article entitled ‘Banking As It Ought to Be,’ in which I have given a compendious view of the whole subject.” (Gouge to Henry Lee, May 1, 1843, Lee Papers, Massachusetts Historical Society). In the latter article, Gouge bluntly states “we are for having the money of the country exclusively metallic.” The article has been overlooked by scholars, doubtless because it was anonymous.

67 Below, Part I, p. 49.

68 “Banking As It Ought to Be,” The United States Magazine and Democratic Review, April 1843, p. 426.

69 Below, Part I, p. 138. Gouge originally proposed that the minimum denomination be $5; by 1837, he held that the minimum should be “$50 or perhaps $100.” (Gouge to Nathan Bunker, November 15, 1837, Princeton University Library).

As late as 1897, Gouge’s view in a modified form was maintained by the eminent Harvard economist Frank W. Taussig. He argued that a way of achieving the circulation of gold was to prohibit bank notes of denominations of $20 and smaller. (Answer to questionnaire in “United States Monetary Commission, Currency Reform,” 1897, Typescript, p. 707. Columbia University Libraries).

Gouge’s underlying logic was: “[since] an efficient demand ensures a supply ... abundant issues of paper cause “specie to flow out of a country”; and elimination of the paper causes an inflow of specie. “[A]n efficient demand for gold and silver ... of all demands ... is the one which is the most readily met. Light of carriage and small in bulk, when compared with their value, the precious metals defy all political regulations which are intended to prevent their obeying the laws of effective demand.” An Inquiry into the Expediency of Dispensing with Bank Agency and Bank Paper in the Fiscal Concerns of the United States (Philadelphia: Stavely, 1837) p. 43. Hereafter referred to as An Inquiry.

70 Below, Part II, p. 218.

71 Mints, A History of Banking Theory in Great Britain and the United States, pp. 174-175.

72 An Inquiry, p. 15.

73 The “Memoir” is in the Woodbury Papers, Library of Congress.

74 Gouge to Woodbury, June 29, 1837, Woodbury Papers.

75 David Kinley, The Independent Treasury of the United States and Its Relation to the Banks of the Country (Washington: Government Printing Office, 1910) p. 67.

76 Inquiry into the Origin and Course of Political Parties in the United States (New York: Hurd and Houghton, 1867) p. 261.

77 Under the National Bank Act of 1863, the treasury could use the banks chartered by the federal government as depositories for its revenues, except customs duties, and by an act of 1907 the exception was dropped. Even after the establishment of the Federal Reserve System in 1914, it was not until 1916 that the secretary of the treasury began to transfer funds from the sub-treasuries to the Federal Reserve district banks. The last sub-treasury was closed in 1921 under the Act of May 19, 1920.

78 “Obituary,” The Journal of Banking, March 16, 1842, p. 310; “Subscribers’ Names,” The Journal of Banking, June 22, 1842, p. 404.

79 “The True Principles of Commercial Banking,” The Journal of Banking, August 4, 1841, p. 36.

80 The phrases are from Gouge to President Van Buren, July 17, 1840, Van Buren Papers, and Gouge to Henry Lee, May 1, 1840, Lee Papers.

81 Gouge to Henry Lee, November 7, 1840, Lee Papers.

82 Editorial, “William M. Gouge,” The Bankers’ Magazine and Statistical Register, September 1863, p. 242.

1The edition which is reprinted below is the first edition. Subsequent editions contained only minor changes. The last appeared in 1841-1842 as supplements to his bi-weekly The Journal of Banking.
2Harry E. Miller, Banking Theories in the United States Before 1860 (Cambridge, Mass.: Harvard University Press, 1927) p. 86.
3While inspector of customs in New York in 1843, Gouge was reluctant to be transferred to Washington on the ground that New York “affords a greater variety of objects with which to divert the mind.” (Gouge to J. C. Spencer, October 25, 1843, National Archives, Treasury.)
4For a discussion of this memorial, see Joseph Dorfman, “The Jacksonian Wage Earner Thesis,” 1949, reprinted in The Economic Mind in American Civilization (1946; reprinted by Augustus M. Kelley • Publishers, 1966) II, appendix.
5Gouge to F. P. Blair, August 17, 1831, Blair Papers, Princeton University Library. He explained that the Gazette had not attacked that “terrific institution,” the Second Bank of the United States, because he would soon have been without adequate funds just to print the paper.
6“Notice,” The Journal of Banking, June 22, 1842, p. 404.
7Gouge was dismissed in April 1841 when the Whigs came to power, but he came back in 1843. In April 1851, after the Whigs had won the presidency, Gouge was again forced out and finally on March 3, 1862, after the Republicans had been in office for a year, he was dismissed. At the time his salary was $1,600 a year.
8Gouge to President Van Buren, July 17, 1840, Van Buren Papers, Library of Congress; Gouge to James G. Guthrie, March 10, 1853, National Archives, Treasury.
9Even when out of government service, he continued to collect data in part with the help of correspondents such as his fellow collector of statistics and future Democratic party candidate for the presidency, Samuel J. Tilden.
10This function is now largely performed by the Comptroller of the Currency.
11His favorite was always Adam Smith. He complained that The Wealth of Nations was seldom reprinted in the United States whereas English translations of Say’s treatise were reprinted many times; “but this is chiefly owing to its having been adopted as a textbook in the colleges, and to a study of it being requisite to enable young men to take their degrees.” (“Political Economy,” The Journal of Banking, February 2, 1842, p. 242).
12Below, Part I, pp. 10, 11.
13“Remarks,” The Journal of Banking, December 22, 1841, p. 196.
14Below, Part I, p. 41.
15Gouge commented humorously that the tract “was free from those peculiarities of phraseology which render other of Bentham’s works sealed books to the great mass of readers.” (“Bentham on Usury,” The Journal of Banking, April 18, 1841, p. 52).
16“Banking as It Ought to Be,” The United States Magazine and Democratic Review, April 1843, p. 427.
17Below, Part I, pp. 91, 132.
18Below, Part I, p. 10.
19“He who has deposited money in the bank, and he to whom it has been loaned, appear as competitors in the same market.... It is the same sum of money.... But there are two credits for this money in the bank, and the credit is equivalent to cash, both to him who has deposited the money and him to whom it has been lent.” (Below, Part I, p. 23.)
20Below, Part I, p. 27.
21Miller, Banking Theories in the United States Before I860, pp. 203-204.
22Below, Part I, pp. 27, 49.
23A good statement of the theory, later called the “realbills” doctrine, is as follows: “Restriction of bank earning assets to real bills of exchange will automatically limit, in the most desirable manner, the quantity of bank liabilities; it will cause them to vary in quantity in accordance with the ‘needs of business’ and it will mean that the bank’s assets will be of such a nature that they can be turned into cash on short notice and thus place the bank in a position to meet unlooked for calls for cash.” [Lloyd W. Mints, A History of Banking Theory in Great Britain and the United States (Chicago: University of Chicago Press, 1945) p. 29.]
24Below, Part I, pp. 50, 51, 52.
25Historians of American banking theory have generally held that Gouge in the late 1830’s began to look favorably on banks of issue if they followed the real bills doctrine. This view was based on certain ambiguous statements in his “Commercial Banking,” (Hunt’s Merchants’ Magazine, April 1843). Interestingly, the same article caused a fellow journalist and opponent of banks of issue to express regret that Gouge sanctioned such banks. Gouge in a private letter to a friend said that he had been misunderstood. “I intended it as an introduction to other articles in which it was my desire to show that banks of issue cannot be so managed as not to produce evil. In The [United States Magazine and] Democratic Review for April, I have published an article entitled ‘Banking As It Ought to Be,’ in which I have given a compendious view of the whole subject.” (Gouge to Henry Lee, May 1, 1843, Lee Papers, Massachusetts Historical Society). In the latter article, Gouge bluntly states “we are for having the money of the country exclusively metallic.” The article has been overlooked by scholars, doubtless because it was anonymous.
26Below, Part I, p. 49.
27“Banking As It Ought to Be,” The United States Magazine and Democratic Review, April 1843, p. 426.
28Below, Part I, p. 138. Gouge originally proposed that the minimum denomination be $5; by 1837, he held that the minimum should be “$50 or perhaps $100.” (Gouge to Nathan Bunker, November 15, 1837, Princeton University Library).
29Below, Part II, p. 218.
30Mints, A History of Banking Theory in Great Britain and the United States, pp. 174-175.
31An Inquiry, p. 15.
32The “Memoir” is in the Woodbury Papers, Library of Congress.
33Gouge to Woodbury, June 29, 1837, Woodbury Papers.
34David Kinley, The Independent Treasury of the United States and Its Relation to the Banks of the Country (Washington: Government Printing Office, 1910) p. 67.
35Inquiry into the Origin and Course of Political Parties in the United States (New York: Hurd and Houghton, 1867) p. 261.
36Under the National Bank Act of 1863, the treasury could use the banks chartered by the federal government as depositories for its revenues, except customs duties, and by an act of 1907 the exception was dropped. Even after the establishment of the Federal Reserve System in 1914, it was not until 1916 that the secretary of the treasury began to transfer funds from the sub-treasuries to the Federal Reserve district banks. The last sub-treasury was closed in 1921 under the Act of May 19, 1920.
37“Obituary,” The Journal of Banking, March 16, 1842, p. 310; “Subscribers’ Names,” The Journal of Banking, June 22, 1842, p. 404.
38“The True Principles of Commercial Banking,” The Journal of Banking, August 4, 1841, p. 36.
39The phrases are from Gouge to President Van Buren, July 17, 1840, Van Buren Papers, and Gouge to Henry Lee, May 1, 1840, Lee Papers.
40Gouge to Henry Lee, November 7, 1840, Lee Papers.
41Editorial, “William M. Gouge,” The Bankers’ Magazine and Statistical Register, September 1863, p. 242.
42Few areas in American history have undergone such intensive study in recent years as the Jacksonian era. A major subject of controversy in that period is monetary and banking policy. It began with President Jackson’s successful veto of the bill for rechartering the embryonic central bank, the Second Bank of the United States, in 1832. The subsequent struggle on both the federal and state levels rocked the nation intermittently for a decade. The ablest writer on the orthodox Jacksonian hard-money side was William M. Gouge (1796-1863); the bible of the movement was his A Short History of Paper Money and Banking in the United States, . . . to which is Prefixed an Inquiry into the Principles of the System (1833).
43Gouge was an agile writer, shy in personal contact and adverse to speech making, but possessed of a persuasive pen, steeped at times in wit and satire. He “was one of the most thorough students of our early banking [including the security and money markets] and also one of its keenest and most influential critics.”
44To furnish perspective on his monetary and banking views, it seems desirable to provide a short biographical sketch and a statement of his general economic philosophy. The son of an apothecary, he was born and raised in Philadelphia. Though he was to spend most of his mature life in Washington, he always preferred large cities, especially New York.
45His career consisted largely of his activities as a financial journalist and as an employee of the United States Treasury; he pursued these occupations simultaneously for a good part of his life. He began as a journalist and first achieved prominence in Philadelphia while serving as co-publisher and editor (with Stephenson Smith) of the Philadelphia Gazette and City Advertiser from 1823 to 1831. He devoted the newspaper chiefly to monetary and banking reforms, advocating primarily what became a part of the Jacksonian creed, the prohibition of small bank notes, as a first step in the elimination of all bank notes. At the same time he helped prepare a so-called “workingmen’s” memorial to the Pennsylvania legislature which sought to prohibit the chartering or rechartering of banks with the corporate power of limited liability. But this was one of those periods when there was relatively little public interest in currency and banking questions. Gouge’s newspaper constantly lost subscribers and he was forced to give up what “had promised to be one of the most lucrative newspaper establishments in the country.”
46His career consisted largely of his activities as a financial journalist and as an employee of the United States Treasury; he pursued these occupations simultaneously for a good part of his life. He began as a journalist and first achieved prominence in Philadelphia while serving as co-publisher and editor (with Stephenson Smith) of the Philadelphia Gazette and City Advertiser from 1823 to 1831. He devoted the newspaper chiefly to monetary and banking reforms, advocating primarily what became a part of the Jacksonian creed, the prohibition of small bank notes, as a first step in the elimination of all bank notes. At the same time he helped prepare a so-called “workingmen’s” memorial to the Pennsylvania legislature which sought to prohibit the chartering or rechartering of banks with the corporate power of limited liability. But this was one of those periods when there was relatively little public interest in currency and banking questions. Gouge’s newspaper constantly lost subscribers and he was forced to give up what “had promised to be one of the most lucrative newspaper establishments in the country.”
47Ten years later, he again attempted the role of editor and publisher; he started the bi-weekly The Journal of Banking, but the result was the same. After a year he was forced by the loss of subscriptions to suspend publication, complaining of the public’s antipathy to economic abstractions, especially “the science of currency.” He pointed to the fate of The Journal of Banking as further evidence that “no journal of political economy or statistics, in either Europe or America ... has ever repaid expenses.”
48From about 1834 to March 1862, Gouge was with the Department of the Treasury except for relatively short periods when the Democrats did not occupy the presidency. Even when the Whigs and their successors were in power, he managed to retain his post for a part of the time. He began, as he put it, as a “mere accountant and copyist,” but was soon charged with the duties of what may be called ‘‘the statistical and politico-economical clerk” of the bureau that served as the immediate staff of the Secretary of the Treasury. In this capacity he should be credited with services of value not only to government but also to the growth of economic science and especially monetary and banking policy. As he described it, his was the task of collecting and arranging the materials that went into the detailed statement of the condition of the banks throughout the Union which the Secretary of the Treasury laid before Congress each year. He used his skills as accountant and statistician to improve the collection and systematization of monetary and banking data that Treasury, Congress and the business world used in making decisions.
49From about 1834 to March 1862, Gouge was with the Department of the Treasury except for relatively short periods when the Democrats did not occupy the presidency. Even when the Whigs and their successors were in power, he managed to retain his post for a part of the time. He began, as he put it, as a “mere accountant and copyist,” but was soon charged with the duties of what may be called ‘‘the statistical and politico-economical clerk” of the bureau that served as the immediate staff of the Secretary of the Treasury. In this capacity he should be credited with services of value not only to government but also to the growth of economic science and especially monetary and banking policy. As he described it, his was the task of collecting and arranging the materials that went into the detailed statement of the condition of the banks throughout the Union which the Secretary of the Treasury laid before Congress each year. He used his skills as accountant and statistician to improve the collection and systematization of monetary and banking data that Treasury, Congress and the business world used in making decisions.
50From about 1834 to March 1862, Gouge was with the Department of the Treasury except for relatively short periods when the Democrats did not occupy the presidency. Even when the Whigs and their successors were in power, he managed to retain his post for a part of the time. He began, as he put it, as a “mere accountant and copyist,” but was soon charged with the duties of what may be called ‘‘the statistical and politico-economical clerk” of the bureau that served as the immediate staff of the Secretary of the Treasury. In this capacity he should be credited with services of value not only to government but also to the growth of economic science and especially monetary and banking policy. As he described it, his was the task of collecting and arranging the materials that went into the detailed statement of the condition of the banks throughout the Union which the Secretary of the Treasury laid before Congress each year. He used his skills as accountant and statistician to improve the collection and systematization of monetary and banking data that Treasury, Congress and the business world used in making decisions.
51From about 1834 to March 1862, Gouge was with the Department of the Treasury except for relatively short periods when the Democrats did not occupy the presidency. Even when the Whigs and their successors were in power, he managed to retain his post for a part of the time. He began, as he put it, as a “mere accountant and copyist,” but was soon charged with the duties of what may be called ‘‘the statistical and politico-economical clerk” of the bureau that served as the immediate staff of the Secretary of the Treasury. In this capacity he should be credited with services of value not only to government but also to the growth of economic science and especially monetary and banking policy. As he described it, his was the task of collecting and arranging the materials that went into the detailed statement of the condition of the banks throughout the Union which the Secretary of the Treasury laid before Congress each year. He used his skills as accountant and statistician to improve the collection and systematization of monetary and banking data that Treasury, Congress and the business world used in making decisions.
52His general economic philosophy was in the Jefferson-Jackson laissez faire tradition. This view he showed more formally in his adherence to Adam Smith and “the axioms of political economy’’ of the British classical school typified by David Ricardo and its continental counterpart led by Jean-Baptiste Say. Gouge, like the classical economists, held that the theory of value was basic in any economic discussion. The laws of supply and demand were all-powerful in the determination of value. For natural value, cost of production was the determining condition of supply, and back of demand was the adaptation of the goods to the wants and desires of the people. “The market value ... is in the compound ratio of their utility and of their scarcity.” Thus the prices of goods and all factors of production would be “much better regulated by free competition than ... by governmental enactments.”
53His general economic philosophy was in the Jefferson-Jackson laissez faire tradition. This view he showed more formally in his adherence to Adam Smith and “the axioms of political economy’’ of the British classical school typified by David Ricardo and its continental counterpart led by Jean-Baptiste Say. Gouge, like the classical economists, held that the theory of value was basic in any economic discussion. The laws of supply and demand were all-powerful in the determination of value. For natural value, cost of production was the determining condition of supply, and back of demand was the adaptation of the goods to the wants and desires of the people. “The market value ... is in the compound ratio of their utility and of their scarcity.” Thus the prices of goods and all factors of production would be “much better regulated by free competition than ... by governmental enactments.”
54His general economic philosophy was in the Jefferson-Jackson laissez faire tradition. This view he showed more formally in his adherence to Adam Smith and “the axioms of political economy’’ of the British classical school typified by David Ricardo and its continental counterpart led by Jean-Baptiste Say. Gouge, like the classical economists, held that the theory of value was basic in any economic discussion. The laws of supply and demand were all-powerful in the determination of value. For natural value, cost of production was the determining condition of supply, and back of demand was the adaptation of the goods to the wants and desires of the people. “The market value ... is in the compound ratio of their utility and of their scarcity.” Thus the prices of goods and all factors of production would be “much better regulated by free competition than ... by governmental enactments.”
55Business corporations, especially banks, possessed of the privilege of limited liability and other perquisites, were “incompatible with the equality of rights and unfavorable to the progress of national wealth.” In the absence of “the Argus eyes of private interest ... their affairs are much more carelessly and ... expensively conducted than those of individuals.”
56He questioned the desirability of laws fixing a maximum rate of interest; here he differed from his master, Adam Smith, and followed instead Jeremy Bentham’s Defence of Usury (1787). “Loanable capital in the form of money, varies in value ... [Consequently] it is as absurd to attempt to fix the rent or interest of money ... as it would be to fix the rent of houses or lands that are bought with money.” Furthermore, if banks were free to raise the interest on loanable capital, as its value in the market increased, this action would “put the whole community on their guard, and many a fever of wild speculation would be checked” at the very start. Similarly governments might issue bonds at a heavy discount but they must redeem them at their nominal price lest the affected states lose their credit.
57He questioned the desirability of laws fixing a maximum rate of interest; here he differed from his master, Adam Smith, and followed instead Jeremy Bentham’s Defence of Usury (1787). “Loanable capital in the form of money, varies in value ... [Consequently] it is as absurd to attempt to fix the rent or interest of money ... as it would be to fix the rent of houses or lands that are bought with money.” Furthermore, if banks were free to raise the interest on loanable capital, as its value in the market increased, this action would “put the whole community on their guard, and many a fever of wild speculation would be checked” at the very start. Similarly governments might issue bonds at a heavy discount but they must redeem them at their nominal price lest the affected states lose their credit.
58The claims of the honest capitalist, Gouge insisted, were just as sacred as those of the honest laborer. His theory of wages was the traditional wages-fund doctrine: “Every increase of capital increasing the fund out of which wages would be paid, would increase the reward of the laborer.” Gouge chastised the lazy and improvident for neglecting to accumulate a capital and thus making themselves independent of “others for means of both subsistence and employment.”
59On matters of central concern to him, money and banking, Gouge argued that the precious metals—gold and silver—were chosen to be money, because their particular qualities “fitted them to be standards and measures of value, and to serve, when in the shape of coin, the purposes of a circulating medium.” They were the most convenient instruments of valuation, especially since they varied less than all other goods “from changes in the relation of supply and demand.” At the same time, he pointed out that bank deposits must be viewed as part of the circulating media, that they might be created by the process of bank loans, and that they had exactly the same effects on prices as bank notes.
60On matters of central concern to him, money and banking, Gouge argued that the precious metals—gold and silver—were chosen to be money, because their particular qualities “fitted them to be standards and measures of value, and to serve, when in the shape of coin, the purposes of a circulating medium.” They were the most convenient instruments of valuation, especially since they varied less than all other goods “from changes in the relation of supply and demand.” At the same time, he pointed out that bank deposits must be viewed as part of the circulating media, that they might be created by the process of bank loans, and that they had exactly the same effects on prices as bank notes.
61Gouge deprecated any deviation from a metallic currency. He contended in the treatise that the present mixed system of currency, of specie and bank notes redeemable on demand in specie, was the primary source of economic evils, especially inflation and subsequent severe depression. Anything that excites the spirit of speculation encourages a tendency to increase the amount of bank issues. With the increase of paper money, prices rise, though in uneven fashion, until eventually the prices of some goods substantially exceed their prices abroad. The resulting adverse balance of trade brings a halt in the rise of prices. Since the foreign sellers will not accept the paper money, importers demand specie from banks. The bankers in turn start calling in loans and refuse extensions and their debtors in turn press their own debtors in what seems an endless chain. The contraction causes a rapid, sharp fall of prices and goods cannot be sold except at a heavy loss. Multitudes become bankrupt but as prices decline, imports fall and gold eventually returns. The confidence of the banks is revived and they begin to issue paper money again, and the circle of expansion and contraction is on. The effect of the restriction of the money supply under a banknote currency was much worse than under a specie standard because of the multiple contraction that results in the “pressure” on the community. Gouge estimated it as fourfold. Not least of the effects of the contraction is the substantial unemployment. Here he brought into play what is called the income approach: “as one man is thrown out of employment, his effective demand for the product of his neighbor’s labor is diminished.... If twenty clerks are deprived of employment, the shoemaker may find it necessary to dismiss one of his assistants ... and so of all other trades. ” In more modern terminology: “as contraction of the currency, by diminishing purchasing power, spoils the market, one employer after another must release his workers. The discharge of a considerable number of employees, depriving them of their incomes, prevents their purchasing as freely as usual, thus tending to diminish production in other lines and further to increase unemployment. A progressive deterioration of the market is introduced, and with it goes like slackening of production.”
62Gouge deprecated any deviation from a metallic currency. He contended in the treatise that the present mixed system of currency, of specie and bank notes redeemable on demand in specie, was the primary source of economic evils, especially inflation and subsequent severe depression. Anything that excites the spirit of speculation encourages a tendency to increase the amount of bank issues. With the increase of paper money, prices rise, though in uneven fashion, until eventually the prices of some goods substantially exceed their prices abroad. The resulting adverse balance of trade brings a halt in the rise of prices. Since the foreign sellers will not accept the paper money, importers demand specie from banks. The bankers in turn start calling in loans and refuse extensions and their debtors in turn press their own debtors in what seems an endless chain. The contraction causes a rapid, sharp fall of prices and goods cannot be sold except at a heavy loss. Multitudes become bankrupt but as prices decline, imports fall and gold eventually returns. The confidence of the banks is revived and they begin to issue paper money again, and the circle of expansion and contraction is on. The effect of the restriction of the money supply under a banknote currency was much worse than under a specie standard because of the multiple contraction that results in the “pressure” on the community. Gouge estimated it as fourfold. Not least of the effects of the contraction is the substantial unemployment. Here he brought into play what is called the income approach: “as one man is thrown out of employment, his effective demand for the product of his neighbor’s labor is diminished.... If twenty clerks are deprived of employment, the shoemaker may find it necessary to dismiss one of his assistants ... and so of all other trades. ” In more modern terminology: “as contraction of the currency, by diminishing purchasing power, spoils the market, one employer after another must release his workers. The discharge of a considerable number of employees, depriving them of their incomes, prevents their purchasing as freely as usual, thus tending to diminish production in other lines and further to increase unemployment. A progressive deterioration of the market is introduced, and with it goes like slackening of production.”
63Gouge insisted that this must not be interpreted as giving approval to the heretical doctrine that general overproduction was the cause of the crisis: “If the real wants of the community, and not their ability to pay, be considered, it will not perhaps be found that any one useful trade or profession has too many members.... But, in one sense, all businesses may be said to be ‘overdone’ since all businesses are by this system rendered unprofitable to those who are engaged in them.” Gouge concluded that any good done by corporate banks is overbalanced by “their continual alterations of the measures of value, by the uncertainty they give to trade, and by the advantages they confer on some men over others.”
64He maintained that the various restrictions on banks that were proposed would not be effective. Take for example, what was then becoming the orthodox view of the proper kind of bank loans; namely, that, if banks would not discount “accommodation notes” but only short term business paper, real commercial bills, they would not overissue. But the discounting of such bills, said Gouge, might cause inflation because “the same lot of goods might be sold to a dozen persons, and each might give a note, and each of these twelve notes might be discounted at bank.” Furthermore, the most stringent legislation could not restrict banks to commercial bills, “if this paper did not afford full employment to all their ‘capital’ and all their ‘credit.’” He expresses sympathy with the proposal to limit bank dividends on the ground that it “would remove many inducements to over-banking,” but felt that such a measure would not be adequate.
65He maintained that the various restrictions on banks that were proposed would not be effective. Take for example, what was then becoming the orthodox view of the proper kind of bank loans; namely, that, if banks would not discount “accommodation notes” but only short term business paper, real commercial bills, they would not overissue. But the discounting of such bills, said Gouge, might cause inflation because “the same lot of goods might be sold to a dozen persons, and each might give a note, and each of these twelve notes might be discounted at bank.” Furthermore, the most stringent legislation could not restrict banks to commercial bills, “if this paper did not afford full employment to all their ‘capital’ and all their ‘credit.’” He expresses sympathy with the proposal to limit bank dividends on the ground that it “would remove many inducements to over-banking,” but felt that such a measure would not be adequate.
66As an ideal remedy Gouge proposed prohibition of all incorporated paper money banks; that is, to eliminate their privileges of limited liability and note issue. In their place he would have banks subject to unlimited liability, lending only their own capital plus savings deposits (time deposits) and maintaining a hundred per cent specie reserve against demand deposits. In this sense, banking, like all other businesses, should be free.
67Gouge expected that private banks would rise up to receive deposits, discount promissory notes and deal in exchange. “The bankers would be men of great wealth, for it is in lending money that men of large fortune can employ their capitals with most profit and convenience.” Their competition would result in more favorable terms to borrowers. They should and would allow interest on savings deposits. At the same time, these banks should impose a small charge in proportion to the amount of service they rendered customers “in the collecting of bills, the receipt of [demand] deposits, or the payment of drafts. In this way, they who derive advantage from the banks would pay their necessary expenses. Now, these expenses are paid by a tax levied in an indirect way, on the whole community.”
68Gouge expected that private banks would rise up to receive deposits, discount promissory notes and deal in exchange. “The bankers would be men of great wealth, for it is in lending money that men of large fortune can employ their capitals with most profit and convenience.” Their competition would result in more favorable terms to borrowers. They should and would allow interest on savings deposits. At the same time, these banks should impose a small charge in proportion to the amount of service they rendered customers “in the collecting of bills, the receipt of [demand] deposits, or the payment of drafts. In this way, they who derive advantage from the banks would pay their necessary expenses. Now, these expenses are paid by a tax levied in an indirect way, on the whole community.”
69Gouge granted that the sudden ending of the old banking system, especially the prohibition of all bank notes, “would be ruinous” to the economy. The answer was to begin with small notes and proceed gradually to those of the highest denomination. This suggestion became a basic monetary policy for President Jackson and his followers, and it enjoyed some success for a time as regards denominations under $5.
70If the state banks were made the depositories of the public funds, and if their notes were made receivable in payment of duties, the evils of the [paper money] system would be increased. If the Government should, after the expiration of the present charter of the United States Bank [in 1836], resolutely refuse to receive anything but gold and silver in payment of debts, and also refuse to employ any bank as an agent in its fiscal operations, the evils of the system would be greatly diminished.
71[Most important of all] ... a larger quantity of specie would be in circulation, thus bringing the money supply a step nearer that of a hard money system.... It was his contention that, if the government received and paid out only coin, additional specie would be imported, and thus the supply of specie in circulation would be increased and the volume of bank obligations decreased. The increase of specie, he claimed, would have the further advantage of producing an increased supply of reserve money available to the banks upon the contraction of their loans. He pointed to the advantage of the “constitutional treasury system” in furnishing an improved means of interregional transfer of funds. Finally, he contended that in the case of a large payment of gold by the government there would be no disturbance to business, whereas, if the banks were acting as the fiscal agents of the government, such a payment would result first in inflation and later in contraction, with all its unfortunate consequences.
72Gouge showed imagination when he described the government as “the greatest capitalist and the greatest dealer in the country” because of the immense volume of transactions, especially those growing out of land sales and customs duties, the main sources of its income; and proceeded to say “Let such a capitalist and such a dealer decline receiving and paying bank paper,” and the issues of the banks would be substantially reduced.
73President Jackson at first went contrary to Gouge’s views by ordering Secretary of the Treasury Roger B. Taney in October 1833 to begin the process of removing the deposits from the Bank of the United States to selected state institutions. But Jackson and some of his cabinet had grave doubts as to whether this should be the permanent policy. So much so that, when Gouge entered the Treasury, Levi Woodbury, the new secretary, had him prepare “A Memoir on the Expediency of Establishing Sub-Treasury Offices.” In the “Memoir”, dated April 1835, he outlined not only the argument “in the abstract ” but also the details of its practical operation and cost.
74No action was then taken on the proposal, according to Gouge, because men supporting the idea of a league of state banks to perform the role of fiscal agent had the ear of the administration and especially Woodbury. But when a money panic began in May 1837 and banks suspended specie payments, Gouge, immediately and without informing the administration, published an elaborated version of the “Memoir” under the title, An Inquiry into the Expediency of Dispensing with Bank Agency and Bank Paper in the Fiscal Concerns of the United States. He archly explained to Secretary Woodbury that “I did not mention to you, or to any other member of the cabinet, my intention of making this publication, because I thought that from my peculiar position, it might be regarded by some as a feeler put forth by the administration, and I wished no person but myself to be compromitted by it, in case it should not prove acceptable to the public.”
75Gouge not only established the system but he also was on the alert to close loopholes. Thus in 1854 he proposed, and Secretary of the Treasury James G. Guthrie adopted, a scheme for reducing transfers of specie to a minimum without making the drafts a currency. These could be obtained at any sub-treasury on deposit of the specie at the issuing office, but they had to be drawn on a specified sub-treasury in order “to prevent their passing from hand to hand as currency. For with the restrictions as to the place of redemption, if they circulated at-all, they would remain in the neighborhood of the sub-treasury at which they were payable.”
76The sub-treasury system won such general approval that ex-president Martin Van Buren could state in the late 1850’s that it was the only clear case of a public measure or act “entirely acceptable to all sides.” It gained this strong support from its practical success in maintaining the credit of the government, especially during the panic of 1857. As President Buchanan noted in his annual message of December 7, 1857, “Thanks to the Independent Treasury, the Government has not suspended [specie] payments, as it was compelled to do by the failure of the banks in 1837.” By this measure as well as by his writings, Gouge played a large role in solidifying if not in rendering more rigid the tradition of hard money that continued to dominate American monetary and banking policy down to World War I, despite the modifications that were made in the original legislation.
77The sub-treasury system won such general approval that ex-president Martin Van Buren could state in the late 1850’s that it was the only clear case of a public measure or act “entirely acceptable to all sides.” It gained this strong support from its practical success in maintaining the credit of the government, especially during the panic of 1857. As President Buchanan noted in his annual message of December 7, 1857, “Thanks to the Independent Treasury, the Government has not suspended [specie] payments, as it was compelled to do by the failure of the banks in 1837.” By this measure as well as by his writings, Gouge played a large role in solidifying if not in rendering more rigid the tradition of hard money that continued to dominate American monetary and banking policy down to World War I, despite the modifications that were made in the original legislation.
78American historians have until very recently widely held that Gouge was the militant champion of the downtrodden western farmer or of the exploited wage earner of the urban east, or of both. Interestingly, he refuted that view in the 1840’s in The Journal of Banking. After noting a number of leading business men who supported hard money, he exclaimed that “the friends of sound currency and sound credit have ... borne too long in silence the reproach of being ‘a miserable set of loco-focos, disorganizes, radicals, levellers, destructives, agrarians, infidels, and atheists’.” The substantial number of “large (solid) capitalists” and professional men on the subscription list should dispose of the diatribe that “dissatisfaction with the present banking system is confined to those whose own hard fortune has made life bitter to them.”
79He also noted that his essay “The True Principles of Commercial Banking” (The United States Magazine and Democratic Review, May 1838) “was much commended by many commercial men, and others, who, from their position and previous studies, were well qualified to judge of its merits and defects. Among others ... a Director of the Bank of England was so pleased with it, that he sent to this country for copies of all the writings of [its] author.”
80Gouge conceived of himself as an “intellectual,” belonging to the growing class of “disinterested political economists.” To achieve necessary banking reform, he realized that more was required than the arguments of a “disinterested political economist.” “It is partly by assistance ... coming from men who would as willingly, if their political ambitions could thereby be gratified, ... aid the banks as oppose them, that I hope for reform.... [I]t is remarked by a theological writer that the wicked are frequently the instruments of doing more good than the righteous, inasmuch as worldly ambition in the minds of the first is generally a much stronger passion than disinterested benevolence in the minds of the latter, and, therefore, when the worldly ambitious happen to seize hold on a right measure, they push it with far more energy than would be done by those actuated solely by desires to promote the public good.”
81He felt that the church had been and could be a powerful force for reform, but the ministers were so split on bank reform that not too much dependence should be placed on the church on this question. Suppose people’s minds will not “yield to the disinterested effort of political economists, to the more selfish efforts of ambitious politicians, or even the heavy artillery of the church. What then? We must do what we can to check the evils we cannot cure. To preserve the balance between evil and good in the world, is all that, according to some writers, can be done. If moral effort ceases, evil will quickly predominate.”
82The obituary of Gouge which appeared in that conservative journal, The Bankers’ Magazine, summed up the dominant opinion on the man and his book: He was “exceedingly well informed on all questions of finance” which he discussed with considerable skill and his book was “a very able and clear exposition of the principles of banking and of the mistakes made by our American banking institutions.”