appeared at this time reflecting the principles of the English antibullionist school.

It is more surprising to find a fallacy of this sort in one of the ablest and most original of the writers with whom we have to deal. Stephen Colwell, writing at the close of our period, brought to bear upon the problems of banking theory an analysis that probed deeper, in many respects, than that of any predecessor. Yet, with reference to the matter of increasing the media of payment, he fell into the tyro's error. So largely had the use of metallic money been dispensed with, through the use of bank notes and of checks operating through mere transfers of deposit accounts on the books of banks, that but a fraction of one per cent of the payments of the world's commerce, in Colwell's estimation, were effected through the transfer of coin or bullion.1 Yet the magnitude of the world's commerce had increased to such an extent that the precious metals were fully employed in the sphere still reserved for them the settlement of balances. "So full is this employment, that it may be said that all the commercial business which is now done without the aid of the precious metals in the payments, is so much of an addition to what would be done if they were exclusively employed."2 To return to the use of metallic money alone would be possible only through the reduction of commerce to a fraction of one per cent of its existing volume.3

Sounder views, such as had earlier been reached by some of the colonial pamphleteers, received the weighty support of the Wealth of Nations. "It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most juone can doubt that the wealth of a country is in proportion to the quantity of its circulating medium, he is unable to understand. "No Political Economist," Free Trade Advocate (October 10, 1829), ii, 232, 233.

4

1 Colwell, Ways and Means of Payment (1859), pp. 259–262.

* Ibid., pp. 170, 171. MacLeod falls into a similar fallacy. Dictionary of Political Economy (1863), i, 72, 73.

* Smith explained that banks make existing capital more active and productive by: (1) substituting an inexpensive currency for coins, thus permitting the latter to be sent abroad in exchange for other wealth; (2) enlivening idle surpluses.

1

dicious operations of banking can increase the industry of the country," 1 was Smith's judgment upon this troublesome problem in banking theory. "The whole paper money of every kind which can easily circulate in any country never can exceed the value of the gold and silver, of which it supplies the place, or which (the commerce being supposed the same) would circulate there, if there was no paper."2 Any excess is promptly returned to the bank for conversion into specie to be sent abroad.

Smith's opinion was quoted at the time of the controversy in Philadelphia over the repeal of the charter of the Bank of North America,3 and it must have been well known in America at practically the beginning of the period we are studying. Yet there seems to have been but little intelligent opposition, in the early years, to the mischievous notions to which Hamilton, not without some wavering, had given his support. There were plenty of invectives against the "rag money" of institutions that "never raised a single bushel of wheat, nor even a single head of cabbage," but virtually no serious attempt to refute on logical grounds the doctrine that advances of credit by banks are additions to the country's capital.

About 1820 discussions of banking reached a decidedly higher plane. This improvement showed itself in the discussion of the issue with which we are now dealing. Thus Raymond, after taking Hamilton to task for his doctrine that bank notes provide more ample media of payment, thereby increasing the country's capital, pointed out that "a paper currency has no more effect in augmenting the capital of a country than changing the denomination of the coin would have." In proportion as the quantity of circulating medium is increased, its value per unit is decreased. If the banks serve the public by loaning to double the amount of

1 Wealth of Nations, book II, chap. 2 (vol. i, p. 303).

2 Ibid., book II, chap. 2 (vol. i, p. 283).

3 James Wilson, "Considerations on the Bank of North America" (1785), Works, iii, 418, 419.

• Raymond, Elements of Political Economy (1823), ii, 137. But see the importance that Raymond attaches to a rapid circulation. Thoughts on Political Economy (1820), p. 301. See also, Letter to the Secretary of the Treasury (1819), by Aristides, pp. 18 ff.

their capital, they would perform an even greater service, upon the same principle, by loaning to ten times the amount of their capital, and, indeed, to any extent to which the finding of solvent borrowers would permit.1

Condy Raguet, in a report as chairman of a committee of the Pennsylvania Senate, disposed in similar fashion of the opinion, "almost universally entertained," that the issue of bank notes increases the community's capital. A bank note, or bank deposit, is not in itself real capital. Nor does the issue of a promise to pay that is acceptable as money make the latter more plentiful, except to the borrower and during the interval in which prices are rising to the new level indicated by the enlarged currency.2 Raguet dilated upon the point in the many writings his prolific pen has given us.3 Gallatin, in an essay that seems to have served as a more or less authoritative statement of the sounder views prevalent at the time, adopted the same position; as did Gouge, in a work no less influential than Gallatin's, though far less favorable toward banks.5

Writers who regarded the inflation of the currency by means of bank notes as an augmentation of the country's capital, could hardly have failed to accept, occasionally, the somewhat more deceptive fallacy that makes the rate of interest dependent upon the supply of money. The notion, commonly held by the Mercantilists, that increasing the quantity of money reduces the rate of interest, was used by many of the colonial writers as an argument for the issue of paper money. One of them based upon it the interesting suggestion that the value of money be stabilized

1 Elements, ii, 132.

2 The Examiner and Journal of Political Economy (1835), ii, 337–339, contains the report, which was made in 1821.

"Principles of Banking," Free Trade Advocate (July 4, 1829), ii, 7; Currency and、 Banking (1839), pp. 95, 96.

• Gallatin, Considerations on the Currency and Banking of the United States (1831), pp. 20-23.

Gouge, Short History of Paper Money and Banking in the United States (1833), p. 45. Cp., for further examples, Amasa Walker, The Nature and Uses of Money and Mixed Currency (1857), PP. 41, 42; C. H. Carroll, "Specie Prices and Results," Hunt's Merchants' Magazine (October, 1857), p. 429.

by so regulating the issue of bills of credit as to keep the rate of interest at six per cent.1

Hamilton was one of the victims of this economic heresy. He approached the problem in attempting to combat the contention of some writers 2 that banks tend to raise the rate of interest because of their insistence upon punctual repayment of loans. Hamilton conceded that this requirement by banks sometimes obliges "those who have adventured beyond both their capital and their credit, to procure money, at any price, and, consequently, to resort to usurers for aid." But, by inculcating habits of punctuality, banks reduce the number of occasions upon which traders are forced to resort to usurers due to the failure of their creditors to make prompt payments.3 Moreover, he added,

If it be evident, that usury will prevail or diminish, according to the proportion which the demand for borrowing bears to the quantity of money at market to be lent; whatever has the property just mentioned [of increasing the quantity of media of payment], whether it be in the shape of paper or coin, by contributing to render the supply more equal to the demand, must tend to counteract the progress of usury.

The view that banks reduce the interest rate by increasing the quantity of currency was in harmony, of course, with Hamilton's belief that capital is created in the process of inflating the circulating medium.

For some time we continue to meet with such statements as that, "Increasing the quantity of money to be lent, without a similar increase in the quantity to be borrowed, must necessarily reduce the interest." 5 Gallatin, however, after stating that bank

1 [Hugh Vance], "Inquiry into the Nature and Uses of Money" (1740), in Reprints, iii, 402, 420.

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

› Hamilton, Report on a National Bank (1790), American State Papers, Finance, i, 69.

▲ Ibid.

' Davies, Bank Torpedo (1810), p. 35. For further illustrations of the opinion that banks reduce the interest rate by making money more plentiful, see Suggestions on the President's Message (1815), p. 4; Blodget, Economica (1806), p. 161. An early example is to be found in the paper which Benjamin Franklin contributed, as a young man, to the cause of paper currency. See "A Modest Inquiry into the Nature and Necessity of a Paper Currency" (1729), in the Works of Franklin, ii, 272.

notes enhance a country's wealth directly only by displacing costly metallic currency, adds that any issue of notes beyond that which results in the export of a like amount of specie, effects but a depreciation of the monetary unit, and does not affect the interest rate, which depends on the amount of loanable capital and the demand for it.1

That banks raise the interest rate by increasing the volume of debts was the curious theory of a writer in the late eighteenfifties, who brought more of stimulating originality to bear upon the problems of banking than he did of ability.2 Bank notes and deposits, he observed, are but bank debts, and are invariably accompanied by a counter-debt on the part of the community. "To this incubus of debt," he added, with less cause for commendation, "we owe the exorbitant rate of interest, so constantly prevailing in this country, and the constant scarcity of money for all the purposes of life." 3

William Douglass shared with his contemporaries the opinion that the interest rate varies with the supply of money, but qualified this with a remarkable contribution to the theory of interest. Increase in the amount of silver money lowers the interest rate, he granted, but increase in the amount of paper money

sinks the value of the Principal, and the Lender to save himself, is obliged to lay the growing Loss of the Principal, upon the Interest. Rhode-Island who have much exceeded us in their Emissions, have for some Time rose their Rate of Interest to 10 or 12 per Cent and give this very Reason for so doing.

While retaining, then, the fallacy of confusing money and other forms of loanable capital, and of regarding the rate of interest as dependent upon the supply of money, Douglass is probably to be credited with being the first to state clearly the

1 Gallatin, Considerations on the Currency and Banking of the United States (1831), p. 23.

2 Charles H. Carroll wrote no book upon money and banking, but expressed his views at considerable length, and with frequent repetition, in a number of articles in Hunt's Merchants' Magazine.

'Carroll, "Money and Banking," Hunt's Merchants' Magazine (January, 1858), Xxxviii, 36.

♦ Douglass, "Essay,” etc. (1738), Reprints, iii, 243. The italics are mine.