he warned, is often ascribed to expansion of the currency, when the two are in fact joint products of speculation. In seasons of confidence, business men are at once prone to buy in large quantities,1 and afforded the facility of doing so by liberal credit terms. There is "a great issue of bills of exchange and promissory notes of merchants and dealers, who thus multiply their engagements, without immediately increasing the quantity of goods in the market." Many of these bills are discounted at the banks and thus converted into bank notes, but the issue of the latter is an alleviation of the evil, rather than an aggravation, for it aids the sale of the goods purchased, upon which the solvency of the speculators depends. To be sure, the high state of confidence which gave rise to such large purchases on credit would not have existed but for the possibility of converting the commercial paper into bank currency. But the initial fault lies with the business men, and not with the banks. "That an increased issue of bank notes, consequent upon over trading, may stimulate prices, especially in the retail trade, is very probable, but not to the extent, nor in the way many suppose.

2

To summarize the discussion: It was generally accepted that changes in the volume of convertible paper money affect prices quite as directly as variations in the supply of specie currency. Some held, however, that bank notes can produce no mischievous price fluctuations because convertibility prevents their overissue. But the advocates of this view were not very numerous. Nor was the doctrine that bank notes admit of no excessive issue because they are put into circulation only in accordance with the needs of trade any more popular. For the most part, it was believed that

1 Colwell, op. cit., p. 567.

2 Ibid., pp. 534, 535. Like many others who attached but minor importance to the influence of an expanding currency upon prices, Colwell viewed a contraction of bank credit with less equanimity. To maintain the convertibility of their demand obligations, he repeatedly remarked, imposes upon banks the necessity of drastically contracting the currency whenever a considerable loss of gold threatens. A collapse of prices results. He would, presumably, attribute this to the psychological influence of curtailed bank accommodations rather than to the operation of the quantity theory itself. Ibid., pp. 483 ff.

they do cause temporary price disturbances, and differences of opinion were mainly as to the magnitude which the latter can assume before correction, called for by dwindling reserves, takes place.

A thesis that received far greater support was that bank notes would, indeed, vary in quantity exactly with the needs of trade (and usually, although not always, this was taken to mean that they would not diverge from the standard of a purely metallic currency), if properly issued that is, if issued only in the discounting of short, real bills. This doctrine, however, since it begs the question whether or not banks do, in actual practice, conform to the approved principle, is quite different from asserting that banks cannot introduce currency disorders. We have postponed its consideration, accordingly, to the pages dealing with matters of banking policy. Not a few accepted the theory, but argued that in point of fact the prevalence of accommodation loans and other abuses resulted in grave disturbances of prices.2

1 Infra, Chapter XV.

2 E. 8., Thomas Cooper, Lectures on... Political Economy (1826), pp. 43, 44, 151.

CHAPTER VII

BANKS RENDER THE CURRENCY ELASTIC IN RESPONSE TO THE NEEDS OF TRADE

The elasticity of bank currency, except in its mischievous aspects, generally ignored. But a few writers did give attention to it.

THE elasticity of the media of payment that banks furnish occupies a prominent place to-day among the benefits attributed to them. This consideration played a most conspicuous part in the criticism of the National Banking System and in the discussion that attended the framing of the Federal Reserve Act. Such was not the case, however, in the literature which we are reviewing. For here the elasticity of bank currency, except in its mischievous aspects, received very little attention. In large measure, no doubt, the prominence of troublesome expansions and contractions accounts for this. And the prevalence of long loans, frequently subject to renewal, may have contributed to obscure the function of banking in giving a desirable flexibility to the volume of media of payment.

It was almost universally agreed that the best currency is one composed wholly of specie, or one consisting in part of bank notes1 but conforming in quantity exactly with the norm of a purely metallic medium. There were few to take a stand against notes secured by government stocks, or against the currency principle as embodied in the English Bank Act of 1844, on the ground that the desirable elasticity of the currency was interfered with. The adherents of the "commercial principle" of banking, as the English "banking principle" was frequently called in this country, argued, for the most part, simply that convertible bank

1 Of course, the elasticity of bank deposits is of no less significance than that of bank notes. But the early writers were concerned chiefly with the latter, and in this chapter, as elsewhere, we shall frequently use the term bank notes, reserving for a later chapter consideration of the question to what extent the similarity of deposits was recognized.

2 Infra, Chapter XIII.

notes issued in discounting short and real commercial paper can have no disastrous elasticity. Bank notes when so issued, it was commonly stated, cause the currency to vary in quantity exactly as it would were it entirely metallic, and any divergence from this was regarded as harmful.1 Not a few were skeptical of achieving the ideal of a currency composed partly of bank notes that would at all times conform in quantity to what would obtain were the currency of precious metals alone. These, accordingly, proposed a return to purely metallic money, or urged that bank notes be issued only against an equivalent amount of coin. The dominant theory was that "in every respect the law of money is the same, whether it exist in the shape of metal or in the shape of paper." 2

No less indicative of failure to apprehend the province of a properly elastic bank currency were the views of those who urged the issue of a fixed amount of government paper. The notion, to which Adam Smith had subscribed, that the volume of currency which every country needs bears a more or less definite proportion to the magnitude of its annual trade, or to its population, was widely accepted. One fifth of the annual product of industry seems to have been a fairly popular standard,3 while a committee of the Rhode Island legislature compromised on one eighteenth of the annual product, being the mean between one fifth and one thirtieth, the two extremes suggested. Charles Carroll regarded one twenty-fifth of the aggregate property of the country as the correct proportion and thought that this ratio was "so well determined by natural laws, that if I would estimate the whole amount of property of the United States, I would rather know the sum of the currency, and multiply it by 25, than to have the most elaborate statistics otherwise prepared."

1

1 Appleton, Remarks on Currency and Banking (1841), p. 16; Lord, Principles of Currency and Banking (1859), p. 29.

2 Barnard, Speeches (1838), pp. 168, 169.

See Mississippi Governor's message accompanying the bank commissioner's report (1838), 25th Congress, Second Session, Senate Document, No. 471, p. 74; also 26th Congress, First Session, House Document, No. 172, p. 476.

• Rhode Island, Report of Committee on Currency (1826).

* Carroll, "New Views of the Currency Question," Bankers' Magazine (1859), xiii, 839.

Just as the champions of banking generally neglected the power of bank notes to conform to the fluctuations of the volume of trade, so its critics, with few exceptions, failed to recognize such a possibility. Decry the pernicious variations of bank notes they did, time and again, but they seemed wholly unaware that any other aspect of the matter was to be considered. Gouge was the principal exception. Unfortunately for the claim that banks expand and contract their issues to suit the wants of the community, he contended, they are compelled to contract when the demand for money is greatest, and are best able to expand when it is least. Not the needs of the public, but their own profit and safety guide them, as well as such untoward events as the outbreak of war, or whatever else may cause specie to flow out of the country.1

Let us turn now to the few who did claim for banks the merit of providing an elastic medium of payment. Bollman, writing in 1810, offers the first instance. The needs of a country for circulating medium, he observed, vary with the extent to which credit is used, and with the rapidity with which property is transferred. A currency of gold and silver lacks the "inherent quality of adapting itself to the exigencies of the times." The possibility, frankly

1 Gouge, Short History of Paper Money and Banking in the United States (1833), p. 62. Colwell, who held in its most extreme form the doctrine that bank credit should improve upon a purely metallic currency through its elasticity, criticized convertibility on the basis of the perverse elasticity that Gouge emphasized. But Colwell's solution was the issue of inconvertible bank notes. Ways and Means of Payment (1859), pp. 12, 169, and passim.

I have found only two other critics of banking who dealt with the claim that elasticity is one of the desirable qualities of bank currency. Editor, Democratic Review (1837), i, 114; Fisk, Banking Bubble Burst (1837), p. 24.

2 Probably no great significance is to be attached to the following words of Franklin: "It is impossible for government to circumscribe or fix the extent of paper credit, which must of course, fluctuate.... Any seeming temporary evil arising must naturally work its own cure." Franklin (in collaboration with Whatley), “The Principles of Trade" (1774), Works of Franklin, ii, 398. Cp. Ibid., p. 417.

3 Eric Bollman, Plan of an Improved System of the Money Concerns of the Union (1810), p. 9.

Bollman (1769-1821) was a physician and apparently no little of an adventurer. Born in Germany, he became successively a resident of France, England, Austria, and the United States. He came to this country toward the close of the eighteenth century, upon his release from an Austrian prison into which he had been thrown for an attempt to free Lafayette from just such a plight. He remained here