CHAPTER V

BANKS DRIVE SPECIE OUT OF THE COUNTRY

Colonial treatment of the doctrine. - Its influence at the end of the eighteenth century. The views of later writers.

WHILE the votaries of the banking system urged as one of its greatest merits that bank notes tend to replace metallic money, many critics gave quite a different interpretation to this fact. The expulsion of specie by paper currency was to them one of the most severe indictments against banks

Colonial writers had commonly argued that the issue of paper money was made necessary by the want of a sufficient supply of metallic money, and had explained this lack by saying that the balance of trade with England was adverse, necessitating the return to the mother country of such specie as was received. There were a few, however, who combatted this reasoning, and asserted: that the withdrawal of specie from the provinces was in reality caused by that very issue of bills of credit for which it was offered as a pretext. "As to Silver and Gold," wrote one, in 1720, “we never had much of it in the Country; but we can very well remember, that before we had Paper Money, there was a sufficiency of it Currant in the Country, and as the Bills of Credit came in and multiplied, the Silver ceased and was gone.'

1

Several later writers adopted this view, in particular that staunch disciple of hard-money doctrines, Dr. Douglass. Although most of the writers of this group recognized also that prices were raised as the quantity of paper money was increased, the tendency of bills of credit to expel specie from the country does not seem to have been correlated with their price influence, if we except one pamphlet of 1749.2 Douglass, for example, simply explained that "by the chimæra of a fallacious Cash,

1 "The Country-Man's Answer," etc. (1720), in Davis's Reprints, i, 410.

2 "Brief Account of the Rise, Progress. . . of the Paper Currency of New England" (1749), in Reprints, iv, 390, 391.

Extravagances are encouraged in favor of a great Consumption of British goods," 1 turning the balance of trade against the colonies. Money was made to seem more plentiful, stimulating the purchase of domestic and foreign products alike.

Benjamin Franklin, on the other hand, in trying to dissuade the Board of Trade from extending the prohibition of bills of credit to those colonies outside of New England, dismissed the objection that paper money drives gold and silver out of the colonies as a "merely speculative" opinion. "The truth is, that the balance of their trade with Britain being greatly against them, the gold and silver is drawn out to pay that balance; and then the necessity of some medium of trade has induced the making of paper money, which could not be carried away." 2

The committee appointed by the Pennyslvania Assembly in 1785 to consider the advisability of repealing the charter of the Bank of North America, made much of the criticism that the bank tended to "banish specie" from the country. In the debate that ensued, this argument seems to have been the one most frequently advanced by the bank's opponents. The discussion of the point was hardly edifying. One legislator argued that the bank was "an engine of trade that enabled the merchants to import more goods than were necessary, or than there was money to pay for, [and that] by means of a bank the European merchants were enabled to procure and carry off money for their goods: and to

1 Douglass, Discourse (1740), p. 322 (Bullock's edition).

* Franklin, “Remarks and Facts” (1764), Works, ii, 342. In a letter to Joseph Galloway, written in London in 1767, Franklin seems to have had some misgivings concerning his espousal of the view that an unfavorable balance of trade made the issue of paper money necessary in the colonies. The English merchants, Franklin thought, misunderstood their own interests when they protested against the further issue of paper money in America. For, "should a scarcity of money continue among us, we shall take off less of their merchandize and attend more to manufacturing and raising the necessaries and superfluities of life among ourselves which we now receive from them. And perhaps this consequence would attend our making no paper money at all of any sort, that being thus by a want of cash driven to industry and frugality, we should gradually become more rich without their trade, than we can possibly be with it, and by keeping in the country the real cash that comes into it, have in time a quantity sufficient for all our occasions. But I suppose our people will scarce have patience to wait for this." Letter to Galloway (August 8, 1767), in Private Correspondence of Franklin, edited by W. T. Franklin, pp. 142, 143.

fix the payment thereof upon the purchasers in that hasty manner which the rules of the bank required. . . . Whereas if it were not in existence, they would be obliged to take produce in exchange for them." Others thought that it is only in countries having an unfavorable balance of trade that banks are disadvantageous in this respect. Nor were the sponsors of the bank more resourceful. One professed himself unable to understand how the bank could possibly facilitate the export of specie by lending money that had to be repaid at the end of a short period.3 "Only a foolhardy borrower," said Robert Morris, "would risk a shipment of money which must soon be repaid." The balance of trade is unfavorable, he admitted, "but why bring this in as a charge against the bank? Has the bank engaged in commerce?" 5 The opinion of Benjamin Franklin, in his reply of 1764 to the Board of Trade, was invoked in support of the idea that, instead of the issue of paper money driving out gold and silver, it is the loss of metallic money through an adverse balance of trade that always brings the necessity of substituting some medium that cannot be drawn away. Thomas Paine contributed a pamphlet in which he scathingly ridiculed the report of the committee of the Assembly. As for the committee's contention that a bank induces the export of specie, he argued that the reverse would rather be true. "Specie may be called the stock in trade of the bank, it is therefore in its interest to prevent it from wandering out of the country," for without hard money a bank cannot carry on its business. The bank "serves as a sentinel over the specie." This attitude was taken by several of the controversialists: banks are institutions which at once find it most to their interest to retain a large amount of specie in the country and are at the same time best able to effect that purpose.8

6

1 M. Carey, Debates and Proceedings (1786), p. 15. See also, Remarks on a Pamphlet by James Wilson, etc. (1785), p. 10; Nestor, "Thoughts on Paper Money," American Museum (1787), ii, 40, 41.

2 Carey, Debates and Proceedings (1786), pp. 15, 24.

3 Ibid., p. 31.

4 Ibid., p. 51.

Ibid., p. 90.

• Barton, "True Interest of the United States," American Museum (1786), ii, 32. 7 Paine, "Dissertations on Government" (1786), Writings, ii, 155–168.

8 Carey, Debates and Proceedings (1786), p. 52.

Many of these early disputants, Paine being the principal exception, made no distinction between bank paper and government paper money in discussing the export of specie. Nor did they usually refer to the price phenomena underlying specie movements. One of the essayists at Philadelphia did explain the part played by prices in causing gold to leave the country upon an inflation of the currency with bank paper,1 and a critic of a contemporary proposal in Maryland for the emission of bills of credit by the state gave a very creditable statement of the theory of gold movements since associated with the names of Hume and Ricardo.2

i

Hamilton, in his Report on a National Bank, dealt with the objection that banks "tend to banish gold and silver out of the country" as "the last, and heaviest charge against them." The current reply, "that it is immaterial what serves the purpose of money, whether paper, or gold and silver; that the effect of both upon industry is the same; and that the intrinsic wealth of a nation is to be measured, not by the abundance of the precious metals contained in it, but by the quantity of the productions of its labor and industry," he found inadequate. The precious metals are too important a species of wealth to permit of treating the country's supply of them as a matter of such indifference. But the objection, he thought, admits of a more conclusive answer, controverting the fact itself. Banks augment the active capital of a country, animating and expanding its industry; with the result that more commodities are produced for export and an inflow of gold and silver is induced.3 Hamilton avoided the error, into which many of the early writers fell, of confusing temporary and permanent movements of specie. With respect to the former, he granted that banks facilitate the export of gold, but this he

1 Witherspoon, Essay on Money (1786), pp. 43, 44. John Witherspoon was a Scotch clergyman who emigrated to America in 1768 to assume the presidency of Princeton College. He was an ardent colonial patriot and by his counsels played a conspicuous part in the struggle for independence.

1 Hanson, Remarks on the Proposed Plan of an Emission of Paper, etc. (1787), pp. 22, 23.

A similar opinion was expressed by William Barton, "True Interest of the United States" American Museum (1787), ii, 32.

considered a merit, as it enables us to pay our foreign indebtedness when no other form of remittance is possible.1

Like many of his predecessors, Hamilton failed to explain the influence of banks on the amount of specie in a country through the mechanism of prices. Later writers, who charged banks with the expulsion of the precious metals, gave this matter its due. Quite frequently the aspect stressed was not the loss of specie, but the relation of banks to domestic industry. A paper currency, raising domestic prices, was held to burden home producers with a disadvantage in a manner similar to that in which a tariff protected them. By raising manufacturers' costs it enabled the foreign producer to undersell the domestic product. The argument was used alike by those who would return to a metallic currency alone,2 and by the friends of protection, who found in the existence of banks in this country a reason for demanding a high tariff.3

The use that Smith, and, about 1810, a number of his American followers, had made of the argument that bank notes do indeed tend to displace specie, but that they thereby effect an economy, could hardly be ignored, however. Nor did it escape criticism. Raymond, after quoting Smith at length, objected that consumers' goods, rather than productive capital, are returned for the specie exported; so that the exchange is that of a spendthrift. J. N. Cardozo, editor of the Southern Patriot, a free-trade organ published in Charleston, South Carolina, offered a specious argument to the effect that the country using bank paper suffers an unfavorable balance of trade due to the inability of the country from which it had been obtaining its gold and silver to continue to purchase imports at its accustomed rate. Charles

5

1 Report on a National Bank (1790), American State Papers, Finance, i, 70. 2 Niles' Register (1818), xiv, 194; Samuel Hooper, Specie Currency (1855), pp. 1-6; C. H. Carroll, "Money and Banking," Hunt's Merchants' Magazine (September, 1857), xxxvii, 309; Amasa Walker, The Nature and Uses of Money and Mixed Currency (1857), p. 39.

3

A P. Peabody, "Financial Crisis," North American Review (January, 1858), lxxxvi, 176; "Speech of Buchanan in United States Senate," 1837, Ibid., p. 184. 4 Raymond, Elements of Political Economy (1823), ii, 152. See, also, p. 135n. Cardozo, Notes on Political Economy (1826), pp. 80-89.