The Natural Law of Money
THE paper-money, or bills of credit, of the different colonies varied more or less in minor details, but in its more important features it may be divided into two kinds: that which had only the guaranty of the colony for its redemption, and that which had in addition a real or personal security. As this latter money was the best ever issued by the colonists, and came to be held in special favor by them, we may confine ourselves to the consideration of this kind. It was put into circulation by the colony's lending it for a term of years on interest, and taking from the borrowers real or personal security; but as none of it was redeemable within a year of its issue, and much of it ran for five or for ten years, it could not maintain stability. The idea that paper-money could be made to maintain par value in circulation by redeeming it in coin on demand, seems not to have occurred to the colonists; they looked to the credit and authority of the state to impose this quality upon their money. The lack of public confidence in the money appeared to them to arise solely from a lack of confidence in its ultimate redemption; the thought evidently did not suggest itself to them that the most absolute certainty of remote redemption could not serve the bill-holder whose immediate necessities demanded metallic money, and that if there were but one such bill-holder among a hundred, the whole volume of paper-money would depreciate until his needs were satisfied.
The first issue of bills of credit was made by Massachusetts in 1690: it was not then known in England or in America why clipped coin should hold its place in the circulation, while coin of full weight could not; although this problem had been solved by Sir Thomas Gresham more than a hundred years before, its solution was not known to the colonists; it was therefore not to be expected that they should understand the workings of their paper-money. England, in common with monarchical Europe, had long before fallen into the way of looking at money as of the king's creation, and what England thought in reference to money, the colonists thought. The crown arrogated to itself the power to fix the value of money, and nobody questioned that power. In the years following the introduction of paper-money in the colonies, it came to be understood that metallic money was but a commodity with which the people were as competent to supply themselves as with any other commodity; but this knowledge was confined to the few, and even the few never understood the nature of paper-money. Nor is there any evidence that the law of metallic money was sufficiently assimilated by any one to enable him to perceive that it was beyond the power of the state to regulate the value of it, or that the assumption of such power by the state was not one of the legitimate prerogatives of sovereignty.
The repeated failures of the colonists to produce a paper-money that would possess the stability of coin, were attributed by them to the nature of the money itself, and not to its inconvertibility; if they had understood the governing principles they need never have been without a sufficiency of good, serviceable money. The whole difficulty was that they looked upon money as a thing that only the state could supply, and they never freed themselves from this mental delusion. The power they depended upon to supply them was not only incompetent for the task, but the coercive instrumentalities which it employed to force its defective money into circulation prevented the natural growth of credit-money which otherwise would have taken place.
Apparently there was always a sufficiency of metallic money in the colonies when it was not driven out by defective paper money; but increasing trade, with its accompanying complexities, called for a more flexible currency, and the appearance of paper-money was in itself a proof that the time had come for its use. The amount of metallic money in the colonies just before the breaking out of the Revolution was estimated at from eight to twelve million dollars. (Alexander Hamilton's estimate was eight million.) The population of the colonies was then less than four millions. Canada, to-day, with a population of five millions, and a trade proportionately very much larger than that of the colonies, finds thirteen million dollars of gold (that metal being her only metallic standard) an ample basis for all her monetary transactions.
Within thirty years of the first issue of colonial paper-money it had come into general use in all the colonies, and in Massachusetts the demand for it was so urgent that it became necessary to establish county loan-offices in order that the borrowers might have an even chance to obtain their pro rata share. In the estimation of the wise and well-to-do of the time, it was a "borrowing-passion," an "epidemic," that had gotten possession of the people. But even a passion and an epidemic have their causes. Back of this movement lay the imperative necessity, if not for more money, at least for a more serviceable money. The backwardness of monetary knowledge at this time may be judged from the fact that, in 1722, George I. issued a patent to one William Wood to make coin from pinchbeck for circulation in the colonies.
Paper-money became a serious question in the politics of the colonies, and continued to be so down to the Revolution; through the pressure of impersonal forces there was a constant demand for it coming from the great body of the people. On the other hand, it was deemed by many to be nothing better than a corrupting monetary innovation. A state wields no power so effective to lift or to lower the morals of a people as its monetary legislation, and no legislation could be more destructive of morality than the paper-money laws of the colonists—laws which put it into the power of a debtor to evade the payment of his just debts, and thus perverted the sense of justice and offered a premium to dishonesty; laws which arbitrarily fixed the prices of commodities, irrespective of cost to the producer, thus striking down one of the chief incentives to industry and frugality, which is profit; laws which prohibited the exportation of coin and bullion, denying to the individual that protection which the state owes him to hold and use his property for his own benefit, and thus converts him into a smuggler and a contemner of law.
It is to this coercive and demoralizing legislation that the failure of colonial paper-money must be attributed, and not to the money itself, not-withstanding its defective character; its lack of stability and of elasticity would have had a tendency to misdirect industry and to incite to speculation, but if utterly vicious measures had not been adopted to force its circulation at a factitious value, we may fairly assume that it would have gradually grown in favor and that its quality would have improved by changes in the manner and form of issuing it. Although these arbitrary laws were not always in force, they were so frequently resorted to as to be inseparably associated with paper-money in the minds of the people. When coin was driven from circulation it was by the operation of the legal-tender quality given to paper-money, and not because the money was paper; but as this distinction never became clear to the popular mind, paper-money circulated under a cloud of distrust even during those times when it rested solely upon its intrinsic merits. Thus it was that the growth and improvement of colonial paper-money was stifled by the king's mandate.
In comparing the colonial paper-money movement with our silver movement, we find a marked similarity as well in the popularity of the two movements as in the character of the opposition to them. The colonist opponents of paper-money took the position that this money was a worse than useless innovation, and that their silver money was all-sufficient. This view was held as late as 1819, by John Adams, who was a student of monetary science; this is shown by the following extract from a letter of his of that year: "I am old enough to have seen a paper currency annihilated at a blow in Massachusetts in 1750, and a silver currency taking its place immediately, and supplying every necessity and every convenience."*3 The public demand for paper-money was attributed to personal dishonesty, and not to any need for this new money. In politics it became a question of individual morals rather than of finance, and there were examples of such rare integrity as men declining from principle to pay their debts in paper; yet the movement went on persistently at all times, when not suppressed by the home government, or when it had not, by excessive issues, broken down in utter wreck. Notwithstanding all the difficulties attending the use of this money, it rendered considerable service to the colonists, and was generally admitted, even by its opponents, to have done excellent service during the revolutionary war. Thomas Paine said of it: "Every stone in the bridge that has carried us over seems to have a claim upon our esteem. But this was the corner-stone, and its usefulness cannot be forgotten."*4
The paper-money movement of the colonists proceeded from the fact that they had reached the stage of industrial development when metallic money could no longer supply all their needs; and the common people's advocacy of the new money proved that their apparent ignorance was but the expression of a profounder instinct. Our silver movement has an equally substantial warrant for its existence; it proceeds from the fact that the money that has been substituted for bank notes will not render service where service is most needed; the need of money is felt, but the nature of the want is not understood. It is believed to be caused by a scarcity of gold, and that an increase in the volume of silver would compensate for this deficiency and supply the need; but this view loses sight of the well-known historical fact that two hundred years ago, when the magnitude and complexities of trade were relatively not a hundredth part of what they are now, the English-speaking people had reached the period of paper-money, when without it the metals could no longer supply their needs, and when further industrial progress was only made possible by an intelligent use of the new money.
The fact has been overlooked that since the introduction of paper-money the natural trend of improvement has been wholly towards an increase of credit-money, and a relative lessening of the need for the precious metals. We have been led away by the delusion that there is not enough gold in the world to supply the world's needs, ignoring the fact that it is value and not volume that constitutes the money standard, and that, therefore, stability is the essential point to be looked to. Under the mistaken impression that the public craving for money proceeds from insufficient supply and not from defective quality, we have attached undue importance to the acts of foreign governments in demonetizing silver; yet while noting clearly the disturbing effects of their action upon the stability of silver, we have ourselves become the greatest disturbers of the silver market; by ignoring the fundamental monetary law which forbids interference with the free flow of the precious metals, we have for the time being rendered silver unfit for monetary use.
Because of the larger diffusion of intelligence and the larger trustfulness that is found here as compared with European countries, together with our immunity from sudden outbreaks of war, a very much smaller proportion of coin is needed by us than in the specie-paying countries of Europe. Indeed, ours is particularly a paper-money country. Notwithstanding the extraordinary effort made to force silver dollars into circulation by paying the express charges on them, the limit of possible output was reached at sixty millions, and these went mainly to the South, a fact that should be noted as showing how true it is that money will always find its way into the channels of employment for which it is best adapted. These dollars are eminently well-fitted to the simple trading of the negroes, and if we should adopt the single gold standard, excluding this coin from circulation, it would retard the industrial advancement of the South. The negro prefers this money to either gold or paper.
Improvement in money proceeds altogether on practical lines, the impetus in that direction coming from the great body of the people, which concerns itself little with economic theories. At the head of this movement is the banker, who has shown that when not trammelled by restrictive legislation, he is entirely competent to meet and provide for the varying conditions of trade that exist around him. But there has been no time in the history of our country when banking has not been more or less restricted by laws intended to protect the bill-holder and the depositor, which, while ineffective for the purpose designed, have operated to retard the growth of the business.
Considerable progress was made in banking methods in the interval between the Revolution and our civil war; but the issuance of government paper-money as a war measure, together with the subsequent suppression of State-bank notes, revived the antiquated idea that it is the duty of government to provide the money of the people. It was this idea that retarded the growth of banking during the colonial period, and it is the prevalence of the same idea to-day that is chiefly responsible for our present monetary backwardness. This superstition so obscured the colonists' views in reference to paper-money that they never got a glimpse of the true principles of banking, and at no time did they ever have a clear perception of money as simply a medium of exchange. They continued to the end to rely upon the authority and credit of the State for their paper-money; this is evidenced by the fact that, notwithstanding the ill-success of the individual colonies with paper-money, it was the general belief when the Continental bills were issued that this "universal money," as it was called, being supported by all the States, must certainly be a success. The failure of Continental money finally produced a general disgust for all paper-money; the prejudice against it was very strong and bitter, especially among moneyed men and people of property; there was still, however, a paper-money party in the country, though it was for the time quiescent.
This was the temper of the public mind in regard to paper-money when the federal Constitution was framed; specie was considered the only legitimate money; the issuance of paper-money was held to be a governmental prerogative, and the right of the state to make it a legal tender was not questioned; but in view of the evil effects already experienced, its issuance was regarded as justifiable only in cases of extreme emergency.
It was not until 1782, when the Bank of North America was started, that the first forward step was made towards the displacement of government paper-money by bank notes. These notes were payable in coin on demand, and were the first paper-money ever issued in America that recognized the essential principle of immediate redemption; but neither in America nor England was the potentiality of this principle fully realized. In neither country was it understood that in no way but through a faithful observance of the principle of immediate redemption could such a sense of public confidence be inspired as would maintain a paper currency at par. In both countries state support was deemed essential. The Bank of North America was practically a national institution; nearly two-thirds of its capital were subscribed by the general government, and it was absolutely under the control of the Finance Minister, Robert Morris. Its notes were receivable as specie for duties and taxes, and in payment of dues from the respective States.
The Bank of England, though at this time it had been in operation for eighty-six years, was still a government monopoly, overshadowing and obstructing any banking enterprise of an individual character. Its capital was government debt, against which notes were issued to an equal amount, and although these notes were payable in coin on demand, this principle, not being fully understood, was not carried out with sufficient promptness and uniformity to remove the distrust of paper-money that lingered in the public mind.
The Bank of England was undoubtedly America's model in banking, but the conditions in America were not such as to permit the establishment of a similar monopoly. The sensitiveness of the States in regard to centralizing power in the general government, combined with a deep-seated jealousy of monopolies, defeated the original design of the Bank of North America, which was to have been the fiscal agent of the nation, with a monopoly of bank-note issue. In this condition of public sentiment, the right of Congress to charter the bank was questioned; it was found that the Articles of Confederation contained no power to charter a bank; but as Congress had already pledged its word, and was itself depending on the bank to supply its pressing need of money, a compromise measure was adopted. The charter was granted "with a recommendation to the States to give it all the necessary validity within their respective jurisdictions." It was also tacitly understood that the exclusive right of the bank to issue notes should end with the war. But the virtual admission by Congress of its defective powers, made it necessary for the bank to obtain a charter from the State of Pennsylvania, and the door was thus opened to joint-stock-company banking.
Before the present national government went into operation in 1789, New York and Massachusetts had each chartered a bank, and when the United States bank was chartered by the federal government in 1790, there were already in existence five corporate banks, holding State charters, with a capital of $3,135,000. In 1794 there were sixteen such banks; in 1796, twenty-four; and by 1804 there were sixty-five, with a total capital approaching $40,000,000.
Thus it was that through a fortuitous combination of circumstances, banking had broken away from the restraints of centralized authority, and was drifting on practical lines into its natural channel. By undertaking, in imitation of England, to issue paper-money through a national bank rather than directly by the government, a line of demarcation was drawn which finally left banking and the production of paper-money in the hands of the people. Though the framers of the federal Constitution had practically precluded the direct issue of paper-money by the federal government, popular opinion in regard to this form of money had not materially changed. In the public estimation, its issuance was a prerogative of government; but to transfer this power to a corporation which, though absolutely under the control of government, embodied in part individual ownership, was deemed to be incompatible with republicanism.
The contest over the United States Bank which in later years became a "burning question" in national politics, had no reference to the prevailing opinion that it was a function of government to supply the people's money. Hamilton, the founder of the Federalist party, and Jefferson, the founder of the Democratic party (then called the Republican party), were at one on that point. They differed as to the expediency of issuing paper-money, Hamilton favoring the issue and Jefferson opposing it; though both looked upon it as a fiscal agency rather than as a medium of exchange. Hamilton's preference was for a single bank which, as the fiscal agent of the general government, should be the only bank of issue for the nation. Jefferson was opposed to all banks of issue, and a national bank he justly looked upon as a centralizing agency in conflict with the principles of popular government.
A better understanding of the principles of money would have shown Jefferson how perfectly they harmonized with his theory of government; but he never clearly understood those principles, and the course that banking had taken disturbed him greatly in his later years. His failure to comprehend the personalism of money is the more remarkable because no one of the fathers of the republic had a truer sense of what constituted popular government than he; and no one of them was in closer sympathy with the great body of the people. The banking "mania" which had seized upon the people was unintelligible to him: "I believe it to be one of those cases where mercantile clamor will bear down reason until it is corrected by ruin," he wrote in 1813.*5 In 1815 he made the following peculiar statement in regard to bank-notes: "The banks were able for a while to keep this trash at par with metallic money, or rather to depreciate the metal to a par with paper, by keeping deposits of cash sufficient to exchange for such of their notes as they were called on to pay in cash."*6 In his plan for reducing the circulating medium, submitted to Mr. Rives in 1819, among other strictures upon the issue of paper-money, he says: "Interdict forever to both State and national governments the power of establishing any paper bank"; and again: "Certainly no nation ever before abandoned to the avarice and jugglings of private individuals, to regulate, according to their own interest, the quantum of circulating medium."*7
And yet it is only through private individuals, each acting in his own interest, that the quantum of circulating medium can be regulated; if all monetary legislation were repealed, leaving the people entirely free to produce their medium of exchange, this medium could move only in one direction, and that towards a higher degree of refinement.
Although the views entertained about money had undergone but little change since colonial times, the conditions stated, which had transferred the production and regulation of money from the general to the State governments, brought this work closer to the people and to their occupations; it was not to be expected that there would be any immediate improvement of the monetary legislation of the States over that of the general government, but with thirteen distinct legislative bodies acting upon this one subject, there would necessarily be differences; these differences in course of time would demonstrate advantages, and this, taken together with their closer relations to the occupations of the people, would necessarily produce improvement in money.
It is not our purpose to follow the growth of paper-money under state legislation—much of this money was positively bad,—but before the breaking out of the civil war and the issuance of greenbacks, there were many instances where the money had reached a stage of development fully abreast with the best economic teachings of that time, and we need not doubt that, if the State banks had been permitted to continue the issuance of paper-money, we should by this time have a money as good as any nation has.
Notes for this chapter
Life and Works, x., 375.
Letter to Abbé Reynal
Jefferson's Works, vol. vi., p. 232.
Ib., p. 434.
Jefferson's Works, vol. vi., p. 147.
End of Notes
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