venience as a medium of payment of bank deposits, representing credit for money actually brought to the bank.1

No less primitive arguments furnished the bulk of the weapons of opponents of banks in the early years. On both sides much more attention was given to superficial assertions derived from naïve prejudices than to arguments based upon thoughtful analysis of the part banks play in our economic life. Gouverneur Morris summarized conveniently the objections offered in 1785.2 The danger of permitting so powerful a monied interest, coupled with chauvinistic fear of its control by foreign capitalists both rendered familiar by the debates later occasioned by the two Banks of the United States were already playing a part in this discussion of our earliest bank.3

Along with the fear of foreign domination of so important an institution, was sometimes found the Mercantilistic notion that the holding of our stock abroad was in itself undesirable because of the loss of specie which the payment of dividends would represent. Robert Morris, who took a leading part in the Pennsylvania Assembly in championing the cause of his favorite, the Bank of North America, replied most effectively to this. "Pennsylvania," he aptly said, "so long as her citizens can derive a better income from the capitals of Europeans vested in our bank stock, than those Europeans derive from the dividends, ought to hold out encouragement for an increase of such stockholders, rather than pursue measures for diminishing their shares." 5 Mathew Carey still dealt, not without impatience, with a similar objection during the parallel controversy that attended the question of rechartering the first Bank of the United States."

1 Cp. Pelatiah Webster, Essay on Credit (1786), in Essays, p. 443, on the advantages of payment by checks drawn upon deposit credits.

2 Gouverneur Morris, Address on the Bank of North America (1785), Sparks's Life of Morris, iii, 440, 441.

3 Ibid., iii, 440. See also, An Inquiry into the Tendency of Certain Public Measures (1794), p. 47; and Newman, Elements of Political Economy (1835), p. 115. Sparks, op. cit., p. 440.

' Carey, Debates and Proceedings, etc. (1786), p. 56.

6 ... "the merest sciolist in political economy well knows that the employment of foreign capital is eminently beneficial." Carey, Desultory Reflections (1810), p. 21.

Banks were also said to share with Hamilton's funding system (with which critics frequently associated them) the evil of tending to increase inequalities in the distribution of wealth. This they were thought to do not only by virtue of the advantages, somewhat mystical, which their owners were thought to enjoy, but also through favoritism in making their loans. As late as 1833, Thomas Cooper, president of South Carolina College, regarded it a very serious defect of banks, that they tend mainly to create a money aristocracy. He explained that banking "affords its facilities never to the poor, but as much as possible to the rich. The poor deal in small and insignificant sums, not worth the attention of a great banking house. Hence these institutions tend to make the rich richer, and the poor poorer and more dependent."

These considerations were political rather than economic. Their significance lies not so much in their influence on theory as in the evidence they give of the state of knowledge of the time with respect to banking. Moreover, similar arguments played no small part at a later date in determining practical policies. Jackson's opposition to the second Bank of the United States placed the bank question in politics, and for a while the monetary system of the country could scarcely be discussed on its merits. Curiously enough, with Jefferson and Jackson bitterly opposing the banking system in the introduction of which Hamilton had played so prominent a rôle, it was the political forefathers of William Jennings Bryan who were the "sound-money" men of our earlier days. The opposition was at first to a national bank only, and was accompanied by approval of state banks. The

Cp. Hamilton, Report on a National Bank (1790), American State Papers, Finance, i, 69; and Report of Virginia Committee on Banks (1816), Niles' Register, ix, (Sup.) 156. See Jackson's Veto Message (1832), in Richardson's Messages of the Presidents, ii, 579-581.

1 Morris, Address on the Bank of North America (1785), Sparks's Life, iii, 441; Enquiry into the . . . Tendency of Certain Public Measures (1794), p. 47; George Logan, Letters to the United States Yeomanry (1793), p. 8; "The Paper System," Niles' Register (1818), xiv, 242.

2 Cooper, Manual of Political Economy (1833), p. 88.

ensuing debacle made opposition to all banks the badge of a Democrat; support, that of a Whig. Prejudice, rather than judgment, prevailed; triumph, rather than truth, was the object; and in such circumstances the quasi economic arguments that we have noted could not but bulk large.

CHAPTER III

BANKS INCREASE THE COUNTRY'S CAPITAL

Inflationist notions in the colonies. Their revival with the appearance of modern commercial banks. — Their general confutation after the first few decades. - The doctrine that bank-note inflation lowers the interest rate. — Douglass's doctrine of appreciation and interest.

No such mild considerations as those dealt with in the preceding chapter occupied the attention of colonial writers. To them the all-important advantage to be derived from banks was nothing less than a direct enrichment of the community through an increase in the amount of media of payment. They saw, for the most part, no essential distinction between the founding of a bank for the issue of paper money, and emission by the government itself; and, barring administrative considerations, they intended their analysis of the economic influence of the one to apply equally to the other.

The colonial arguments for an increase in the volume of currency ranged all the way from the naïve inflationist view that a larger currency would be in itself an enrichment of the community, or that it would make the colony wealthier by increasing values, to the more reasonable opinion that the lack of an adequate currency retarded trade. Plenty of money, wrote the Reverend John Woodbridge in 1682, "multiplies Trading; Increaseth Manufacture, and Provisions; for domestic use, and foreign Returns; abateth Interest." No less sanguine was the Reverend John Wise, who wrote that an abundance of bills of credit, whether public or private, "will beget and bring forth whatsoever you shall please to fancy. For do but Fancy or wish a Noble Fort in any of your Frontiers; set the Bills to work and up it goes in a Trice." The growth of Harvard, waging successful

1

1 "Severals Relating to the Fund" (1682), A. M. Davis, Reprints, i, 113. Woodbridge had been inspired by William Potter, the author of an early English pamphlet called The Key to Wealth. (See Reprints, i, 3.)

wars against the Indians, commercial and agricultural development "all is to be attributed to our Bills of Credit." 1

The dominant theory among the colonists, however, was not that increase in the quantity of media of payment was in itself an addition to wealth, or that it need always lead to such; but that, in the absence of a certain adequate supply of currency, the issue of paper money would greatly stimulate industry and trade. "There is a certain proportionate Quantity of Money," wrote Benjamin Franklin in 1729, in a passage typical of the time, "requisite to carry on the Trade of a Country freely and currently; More than which would be of no Advantage in Trade, and Less, if much less, exceedingly detrimental to it." There were few, however, to question that this necessary quantity was lacking; and complaint of the scarcity of currency was made by nearly every writer.3 A number of them pointed to the frequent resort to "truck trade," or barter, as indicating this lack. The customary explanation of the want of media of payment was that the unfavorable balance of trade with England caused the metallic money of the colonies to flow to the mother country.5

1 "A Word of Comfort," etc. (1721), Reprints, ii, 172–178.

* "Modest Inquiry into the Nature and Necessity of a Paper Currency" (1729), Reprints, ii, 336. In his Autobiography (Weld edition, p. 113) Franklin informs us that, upon the enactment of an inflation bill soon after the appearance of his "Modest Inquiry" (which was published anonymously), his friends in the Pennsylvania legislature "thought fit to reward me by employing me in printing the money; a very profitable job and a great help to me. This was another advantage gained by my being able to write."

• The preamble of the Massachusetts act of 1690, authorizing the first emission of bills of credit by any colony, reads, "Considering the present Poverty, and (through Scarcity of Money) the want of an Adequat Measure of Commerce . . ." (Reprints, ii, 307.)

Some of these preambles of colonial currency legislation make interesting reading. In authorizing its public land bank of 1715, Rhode Island explained in a two-page opening sentence that, "Whereas it hath pleased God to suffer the French and Indians, our late Enemies, to maintain a long, bloody, and expensive War," the colony was sore distressed for want of circulating medium, and "Trade is sensibly Decayed." The "decay" of trade was a perennial complaint.

4 "Distressed State of... Boston Once More Considered" (1720), Reprints, ii, 74, for example.

' Governor Pownall, upon whom the lessons of the colonial issues were not entirely lost, wrote in 1774 that in "colonies, the essence of whose nature requires a progressive increase of settlements and trade, and yet, who from the balance of