INTRODUCTION

CHARACTERISTICS OF THE PERIOD

RELATIVITY OF ITS

BANKING THEORIES AND PRACTICES

THE theories of banking that prevailed in the United States before 1820 were, in general, wretchedly primitive. Colonial discussions had dealt largely with paper money emitted by the government, or by the land banks that we have learned to associate with the period. Such tracts as considered paper money redeemable in specie referred almost invariably to post notes. Accordingly, what progress was made in the theory of banking had little bearing upon more than the most elementary principles of commercial banking of the modern type.

Not until about 1820 does the knowledge of banking principles in this country seem to have reached a degree of development comparable to that found in the Wealth of Nations. Smith's doctrine that the use of paper money effects an economy by releasing metallic money for export was, apparently, scarcely known much before 1810. A decade later, exports of metallic money were still being explained in terms of Smith's vague overflow of the "channels of circulation," in apparent obliviousness of the work, at the beginning of the century, of Boyd and Thornton and later English writers in substituting an explanation in terms of the definite and clear-cut mechanism of rising prices, diminishing exports, and increasing imports.1 The notion that a certain fixed quantity of currency is necessary to circulate the annual product of each country's industry underlay the views of almost all the writers. Those who, in common with Douglass and others of the preceding

1 Precursors of Smith, notably Hume and Harris, had explained the distribution of the precious metals in terms of the quantity theory, but Smith had not adopted their ideas. Thornton and the other immediate predecessors of Ricardo had brought the doctrine anew to the general attention. See Hollander, "Development of the Theory of Money from Smith to Ricardo," Quarterly Journal of Economics, xxv, 429-470.

century, showed that they understood the quantity theory, still retained with it this crude idea of a given volume of media of payment that would "fill the channels of circulation."

Throughout most of the period, indeed, the problems that were discussed were more like those which had concerned Smith than the new ones to which the contemporary discussion in England had advanced. Quotations from English works were still preponderantly from the early master. The noteworthy debates aroused by the British Restriction Period were not without their influence in America, especially in the latter decades; but, with few exceptions (in particular, Colwell's Ways and Means of Payment), its more subtle aspects found little counterpart here. The American theory remained, on the whole, less sophisticated than the English.

Not that there was lack of progress. About 1820 the consideration of banking became more philosophical. Hitherto nearly all the writings had been distinctly occasional, called forth from hurried pens by some special question of the day. First we have the controversy in Philadelphia precipitated in 1785-1786 with respect to the Bank of North America; then Hamilton's Report on a National Bank and the arguments centering around the Bank of the United States; next, the problems of suspended specie payments, beginning in 1814. To be sure, it was in just such an atmosphere that the English writers had contributed so markedly to the progress of banking principles. But our problem was different: we were too new at the business of banking to develop sound theories at first hand; our experience had been too

1 As late as 1837 the scholarly Senator Rives of Virginia declared Smith to be the best authority upon currency problems, and asserted that "the general principles he has laid down on the subjects of banking and currency continue still to be appealed to by the enlightened writers who have followed him, as affording the soundest exposition of those subjects, whatever modifications of subordinate points may have been made by subsequent inquirers." William Cabell Rives, Speech in the Senate on the Currency of the United States (January 10, 1837), pp. 6, 7.

Not all the unlearned writers were as candid as one pamphleteer of 1826, who pleaded that any error in his argument be attributed "to the head and not to the heart," since his knowledge of the subject of banking, like that of a purchaser "sight unseen," was "more from the outside of books than a correct knowledge of their content."

completely with banking in a pathological state. Cliffe Leslie has justly remarked that the greatest scientific progress is made when economic disorders raise vexing questions as to their causes.1 But first there must be some notion of the differences between normal and abnormal states. Before we could discuss intelligently the ills of our banking system, we had to have some conception of how a properly adjusted system functions. This our own experience had not yet given us, and the quickest way to acquire it was by digesting what the English already knew.

For some reason little was done in this direction much before the turn of the quarter-century. But now there appeared among the "voluminous essays, . . . 'thick as autumnal leaves,"" which the currency question evoked, a significant number of works that centered less completely around the specific conditions that prompted them, and savored far more of the abstract treatment of universal problems, approached from a detached point of view.^ First there were Raymond's books, then Cooper's, Cardozo's Phillips's, and Lord's. Raguet, McVickar, and Gallatin were beginning to write. As we turn into the eighteen-thirties the list of such writers lengthens. Men had taken the time to acquaint themselves with what had been said in England, and with the work of such writers as Say. With them the crude fallacies of Hamilton and the childish dawdlings of lesser writers disappear.

The American discussion remained throughout, we have said, relatively unsophisticated. Its concepts were simpler than those of the English discussion; it ran in terms that the lay mind could more readily grasp. But it was none the less significant. In the analysis of the nature of bank deposits, of the dogma that the issue of notes against real commercial paper is self-regulative, of the nature of the business cycle, American writers seem to have reached sound conclusions before their English cousins did.

That we should find inconsistencies in the writings of these early students of banking problems need not surprise us. Rather would their absence in such a formative period be strange. Problems abounded, the existence of which was not realized.

1 T. E. C. Leslie, "Political Economy in the United States," Fortnightly Review (1880), xxxiv (old series), 491.

The full significance of their views was often hidden from the writers themselves. Not merely did they frequently change their opinions — the notions they held at any one time often embodied clashing principles. Raguet furnishes a classic example; he was at once one of the most suggestive and one of the most inconsistent of the men with whom we are concerned. A leading contradiction, which was the rule rather than the exception (and it was shared by English writers), was that involved in asserting that banks can but distribute the purchasing power that they receive from stockholders and depositors, while recognizing at the same time that by expanding their loans banks can raise prices.1 Again, after many writers observe the similarity between notes and deposits as components of the currency, must we regard their persistent reasoning in terms of notes alone, when discussing prices and like problems, simply as a shorthand manner of expression, or as an illustration of the way in which man's brain works in water-tight compartments?

The work of several of the writers was marred by what seems like studied combativeness. Raymond and H. C. Carey showed this disposition in highest degree. One cannot escape the feeling that they often opposed generally received views merely because of the pressure of their pugnacious non-conformist instincts. The general effect is much like that of the bitter personalities that characterize the colonial tracts.

The relativity of economic theory to its institutional setting is too familiar a matter to call for more than casual notice here. Needless to say, illustrations of it abound in our study. The chief differences between the characteristics of the American and the English discussions were due to the different questions which banking, as practised in each country, raised. American theory in general did not dig so far below the surface because it was still largely concerned with the relative utility and disutility of banking. In England the advantages of fairly orderly banking had been too long enjoyed to make this a matter of much more than academic interest. To turn to other examples, the thesis that

1 See Chapter VIII.

bank notes can never be overissued so long as they remain convertible on demand scarcely took root in this country because the poor homing power of our notes forbade. Again, the English discussion differed from our own because of the peculiar significance of Bank of England notes as cash reserves of the other banks. The question of a national bank, which occupied so much attention in this country, raised essentially different issues. And, finally, in England criticism of a central bank led to detailed discussion of bank policies in their relation to the price level, whereas in America, with its decentralized banking, lack of a suitable mechanism for putting the more refined notions into effect made the legal safeguarding of note issue a more practical problem.

Reversing the relationship, the influence which the developing principles of banking exerted upon banking practice is no less obvious. As the crass doctrines of the early inflationists began to be abandoned, legislation became more intelligent. With the growing realization of the essential part played by specie reserves, a sounder policy was adopted, whether voluntarily or by legal compulsion. Better understanding of the nature of deposits called a halt to the practice of limiting the volume of notes by that of deposits. And legal reserve minima began to be related to deposits as well as to notes.

There are few men who stand out as meriting attention by reason of definite original contributions. With the exception of an occasional Raguet or Colwell, most of those who contributed to the discussion are significant chiefly as reflecting the general state of banking theory at the time. Our study is decidedly one of doctrines and not of men. The questions asked are, “What was known about this matter or that?" rather than what a certain writer thought.1 And with respect to the former type of inquiry a study of the period is fruitful. There was, almost to the end, much criticism, richly merited, of the practices of individual bankers as such. Fraud and artifice constituted a large chapter in the history of our early banking; and when they were lacking,

1 It is pleasing, withal, to find interspersed among the gamut of merchants and bankers, physicians and statesmen, a goodly number of writers who were scholars of no mean distinction.