Paper currency

“ Probably not more than half the amount of the latter; showing that when our paper currency is compared with gold and silver its commercial value is compressed into three hundred and fifty millions. This striking fact makes it the obvious duty of the Government, as early as may be consistent with the principles of sound political economy, to take such measures as will enable the holders of its notes and those of the national banks to convert them, without loss, into specie or its equivalent. A reduction of our paper circulating medium need not necessarily follow. ”

“ It has uniformly recognized in its fiscal affairs the distinction in value between paper currency and coin. Some of its loans are made payable specifically in coin, whilst others are payable generally in lawful money. It goes frequently into the money market, and at one time buys coin with currency, and at another time sells coin for currency. In its transactions it every day issues its checks, bills, and obligations, some of which are payable in gold, while others are payable simply in dollars. And it keeps its accounts of coin and currency distinct and separate. ”

“ Each, therefore, serves equally to supply means of speculation to the merchant. So far, moreover, as bills and notes constitute what is called the circulating medium, or paper currency of the country, and prevent the use of guineas, the fictitious and the real bill are upon an equality; and if the price of commodities be raised in proportion to the quantity of paper currency, the one contributes to that rise exactly in the same manner as the other. ”

“ In actual working they are now affected by the existence of representative money. The state issues paper money which may be either convertible or inconvertible, or if it refrains from so doing, the banks take up the task and supply a medium of exchange in the form of notes, or by a later development through providing for the use of cheques by their customers. An inconvertible paper currency has some pronounced affinities with overvalued metal; a duly regulated issue of this kind is quite on the lines of the gold-exchange system, and the difficulties of the two forms are very similar. ”

“ Bills of exchange and paper money, which have become known and general only in modern Europe, might have gone far to mitigate these disastrous consequences in particular states, or even, if conducted with prudence and regulated by wisdom, might in some places have altogether prevented them. But as paper currency is a new element of surpassing power and efficacy, but recently introduced into common use among men, the principles on which it should be regulated are far from being generally understood. ”

“ Coin is an universal sign of wealth, and will procure it every where. It will bear any alarm, and stand any shock.—On the contrary. Paper, owing its currency to opinion, has only a local and imaginary value. It can stand no shock. It is destroyed by the approach of danger; or even the suspicion of danger.
In short. Coin is the basis of our paper-credit; and were it either all destroyed, or were only the quantity of it reduced beyond a certain limit, the paper circulation of the kingdom would sink at once. ”

“ Not only within the country had we a local and general currency perfectly sound, but in whatever quarter of the globe American commerce had penetrated, there also did the bills of the United States bank command unbounded credit and confidence. Now we are in danger of having fixed upon us, indefinitely as to time, that medium, an irredeemable paper currency, which, by the universal consent of the commercial world, is regarded as the worst. ”

“ And when a single bank of issue fails to meet its liabilities, it always tends to throw a partial discredit over the whole paper circulation of the kingdom.
Whatever may be the other qualities desirable in a paper currency, it appears to us to be almost axiomatic, that it should, if possible, be rendered as secure as a currency purely metallic—as stable as the Government itself. But this we contend can never be accomplished, so long as the privilege of issue is conceded to any very considerable number of separate banking companies. ”

“ One of the most obvious differences between a metallic and a paper circulation is, that the coin can never, by any panic or national danger, be reduced below the value of bullion in other civilized countries; whilst a paper currency may, from the action of such causes, totally lose its value. ”

“ By the currency theorists it is still maintained that a paper currency ought to contract and expand exactly as a currency purely metallic would do in the like circumstances. But this is palpably equivalent to asserting, that whatever evils are inseparable from a metallic currency ought to be, not avoided, but perpetuated in a mixed currency. ”

“ A reference to the amount of banking capital and the issues of paper credits put in circulation in Great Britain, by banks and in other ways, during the years 1834, 1835, and 1836 will show an augmentation of the paper currency there as much disproportioned to the real wants of trade as in the United States. With this redundancy of the paper currency there arose in that country also a spirit of adventurous speculation embracing the whole range of human enterprise. Aid was profusely given to projected improvements; large investments were made in foreign stocks and loans ”

“ But in the present situation of the Bank, intrusted as it is with the function of supplying the public with that paper currency which forms the basis of our circulation, and at the same time not subjected to the liability of converting the paper into specie, every advance which it makes of capital to the merchants in the shape of discount, becomes an addition also to the mass of circulating medium. ”

“ B., that the plan for the support of public credit which General Hamilton brought forward, in 1791, was a plan for the establishment of the paper system in our America. We had at that time a gold currency which was circulating freely and fully all over the country. Gold is the antagonist of paper, and, with fair play, will keep a paper currency within just and proper limits. It will [441] keep down the small notes; for, no man will carry a five, a ten, or a twenty dollar note in his pocket, when he can get guineas, eagles, half eagles, doubloons, and half joes to carry in their place. ”

“ They abound in countries where no other currency is allowed. In our own States, where small notes are excluded, gold and silver supply their place. When driven to their hiding places by bank suspensions, a little firmness in the community soon restores them in a sufficient quantity for ordinary purposes. Postage and other public dues have been collected in coin without serious inconvenience even in States where a depreciated paper currency has existed for years, and this, with the aid of Treasury notes for a part of the time, was done without interruption during the suspension of 1837. ”

“ The opposers of a solvent paper currency either ignorantly overlook, or craftily and dishonestly attempt to keep out of sight, the vital fact that, in all safe, legitimate, solvent, and prudent banking, all the notes issued for circulation will be wanted to pay the notes discounted, and will come back to the banks in payment of notes discounted; and that it is only rarely that any other redemption-redemption in coin-will be demanded or desired. ”

“ On the other hand, the objections to a policy, which divided the country up for the purposes of paper currency, are also plain. The limitation of the areas of legal tender and of the offices where the notes were encashable on demand greatly restricted the popularity of the notes. It might well have seemed worth while to popularise them, even at the expense of temporary loss. As soon as the public had become satisfied that the notes could be turned into coin readily and without question, their desire to cash them would probably have been greatly diminished. ”

“ In reality there is no such thing as an inflation of prices, relatively to gold. There is such a thing as a depreciated paper currency. ”

“ All will agree that soiled paper money is at least not a thing of beauty, and the unpleasant odors and filth accompanying some bills offend every esthetic sense, and give good foundation for the demand for a more frequent issue or redemption of our currency by the government. Everybody who has traveled abroad will admit that our paper currency is a disgrace when compared to the clean, crisp money to be found in many of the foreign countries, where soiled or worn bills are almost unknown. ”

“ Other statistics, also gathered by the Comptroller of the Currency, show that in retail transactions throughout the United States the medium of exchange is composed, on an average, to the extent of about forty per cent of checks and sixty per cent of paper currency and coin. The smaller retail transactions are effected almost entirely by the use of coin; as the transactions become of greater value, the more does paper currency enter into them ”

“ Although an inconvertible paper currency has no intrinsic value, it can (in accordance with the quantity theory of money) be maintained at a fairly stable ratio to gold or commodities by an honest government if the total issue is fixed, or kept between reasonable maximum and minimum limits. ”

“ Most foreign countries issue metallic money only, except those that are on a paper basis. In general the paper currency is issued by banks, many of which are more or less remotely associated with the government. Some of these banks issue notes on the security of the government or other stocks and bonds, while many emit notes based on no special form of security, but upon the general assets of the bank. ”

“ The paper currency, which might serve for domestic purposes, is useless to pay the debt due in Europe. Gold and silver are therefore drawn in exchange for their notes from the banks. To keep up their supply of coin these institutions are obliged to call upon their own debtors, who pay them principally in their own notes, which are as unavailable to them as they are to the merchants to meet the foreign demand. ”

“ This narrow view of money compelled the states to supply paper currency, and this led to a great diversity of money, depending upon the credit, the habits and the wants of the people of the different states. The United States notes, commonly called greenbacks, were the creature of necessity, but proved a great blessing, and only needed one attribute to make them the best substitute for coin money that has ever been devised. That quality was supplied by their redemption in coin, when demanded by the holder. ”

“ The effects of the depreciation of the paper currency in the United States are thus described by Mr. Wells: “It renders it impossible to sell abroad the products which have cost too much at home, and invites from other countries the products of a cheaper labor paid for in a sounder currency. It exaggerates imports, while destroying our ability to pay in kind.” ”

“ The easiest way to accomplish this is to leave the use of the paper currency optional by making it convertible into coin at the will of the holder. The amount of the circulation is thus automatically fixed by the action of the community. An evident disadvantage is the necessity of keeping an adequate reserve of coin to meet actual and prospective demands. For ideal security the whole amount of paper issue should be covered by an equal value of metal. ”

“ The seigniorage could never be reduced to less than zero. Money can never be materially cheaper than the metal composing it, since the slightest tendency in this direction will result in coin being exported or melted into bullion. In a period of rising prices, regulation would be easy; in a period of falling prices, regulation might be quite impossible.*41
XIII.24 Another plan is a convertible paper currency, the paper to be redeemable on demand,—not in any required weight or coin of gold, but in a required purchasing power thereof. ”

“ While the circulation of commodities can absorb only a definite quantity of gold coin and as a result of that the alternating contraction and expansion of the currency appears as a necessary law, paper money seems to enter circulation in any desired amount. While the state is guilty of debasing gold and silver coin and of disturbing their function of a medium of circulation, if it turns out a coin, only 1-100 of a grain below its nominal weight; it performs a perfectly proper operation by issuing absolutely worthless paper notes which contain nothing of the metal except its mint denomination. ”

“ Not so, however, with an inconvertible paper currency. Excepting the specie used in the payment of customs and the interest on our public debt, we are cut off from the money currents of the world. Our currency resembles rather the waters of an artificial lake, which lie in stagnation or rise to full banks at the caprice of the gate-keeper.
335“Gold and silver abhor depreciated paper money, and will not keep company with it. If our currency be more abundant than business demands, not a dollar of it can go abroad; if deficient, not a dollar of gold will come in to supply the lack. ”

“ The volume of bank currency, under a well-regulated system, is determined by the requirements of the business of the country. When more is needed it will become profitable to issue more, and it will be issued. When less is needed, the excess flows back to the banks and withdraws. It is a self-adjusting process. The volume of Government paper-currency is fixed by law, and that law is made by politicians. ”