INFERENCES
DERIVED FROM THE THEORY

continued

Essay on Money VI

As a Medium of Commerce;
With Remarks on the Advantages and Disadvantages
of Paper Admitted into General Circulation.

by John Witherspoon

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Paper circulating as a medium of commerce is a promissory note -- not money.

The principles above laid down will enable us to perceive clearly what is the nature of paper circulating as a medium of commerce, what is its real and proper use, and what are its dangers and defects. As to its nature, it is a sign but not a standard. It is properly an obligation, or to use a modern commercial paper, it is a promissory note. It is not money, as has been shown above, but it is a promise of some person or body of men to pay money either on demand or at a particular time.

Obligations of this nature are of more sorts than one. Sometimes they are given by particular persons, or trading companies, who are considered as persons; and frequently in America they have been given by the legislature of the state. In the general definition I have included all kinds of negotiable paper, but it will not be necessary to insist upon more than two of them, vis the notes of banking companies, and state emission.

Bills of exchange are not supposed to pass through many hands, but to proceed as speedily as may be to the place of their payment. Government securities are only bought and sold like other property, and so any bonds of other private obligations may be transferred as often as people are willing to receive them; but the notes of banking companies, and the state emissions of this country are intended to be, properly speaking, a circulating medium. They are of various regular denominations, and intended to answer all the purposes of money in the smaller transactions of society as well as the larger, and even to go to market for purchasing the necessaries of life. (37.9)

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It is the public opinion that must ultimately give them currency

As to value, such obligations must plainly depend upon the credit of the subscriber or obligor, and the opinion or expectation of the receiver. These are mutually necessary to their use in commerce. Let the resources or wealth of the subscriber be what they may, it is the public opinion that must ultimately give them currency.

This opinion however may be in some instances better, and in some worse founded. That paper which may with most certainty and expedition be converted into gold and silver, seems evidently to have the advantage on this account. Therefore the notes of banking companies, while they maintain their credit, and continue to pay on demand, appear to be the best calculated for general use.

They seem also to have another advantage, that private persons and companies are upon a footing with the holder of the bills. He can arrest them, and bring them to account, and have justice done upon them; whereas he cannot call the legislature to account, but must wholly depend upon their fidelity as well as resources. Yet it must be owned there have not been wanting instances formerly in this country, in which paper emissions by the states have obtained full confidence, and met with no impediment in circulation. (38.7)

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Proper use of paper currency

Let us now consider what is the proper use of paper currency, or whether it be of any real use at all. Many persons in Europe have declared against it altogether as pernicious. I will endeavor to state this matter with all the clearness I am capable of, and to give the reasons for what I shall advance.

We have seen above that nothing can be more absurd than to say that we now want a circulating medium, and that paper is necessary for that purpose. A circulating medium we have already, not in too small, but in too great quantity; so that any person who understands the subject may perceive that gold and silver, especially the last, is losing at least one of the qualities necessary for that purpose, and becoming too bulky and heavy for easy and convenient transportation. Brass, as has been shown above, was once as just and proper a medium of commerce as gold and silver are now. It has all the qualities necessary for that purpose still, except rarity; so that if it were not too plentiful and too cheap, it would be money to this day.

It is probable that this circumstance of the abundance and weight of the precious metals is what gives to many such an inclination for paper money. Thus will appear strange to some, yet I believe it is at bottom just. The cry with many is, we must have paper for a circulating medium, as there is such a scarcity of gold and silver, whereas in fact, gold and silver used as a circulating medium are so cheap, and the quantity of a moderate sum is such an encumbrance that we want paper, which can be much more easily carried, and much more effectually concealed. So that, contrary to the vulgar idea, we are obliged to have recourse to paper in several cases, not for want of gold and silver, but their too great abundance.(39.9)

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Over-abundance of gold and silver

This will appear to be a very uncouth idea to many persons. What, they will say, too great abundance of gold and silver! When I go about from day to day, and cannot collect what is due to me; when my creditors are calling upon me and I cannot satisfy them. There is a scarcity of money every where. What shall be said to satisfy these persons? I must tell them plainly. It is their poverty, or the nation's poverty, and not a want of gold and silver, and if there were a hundred times as much gold and silver in circulation as there is, their poverty and difficulties would be just the same. If these persons read the scriptures, they may there learn that in Solomon's time the silver was as plentiful as stones in Jerusalem; probably they will think that all the people in Jerusalem at that time must have lived like Princes, but they must be told, that it was added as necessary consequence, that it was nothing accounted of in the days of Solomon.(40.5)

Continue to Essay on Money VII for a discussion of the Benefits of Paper.

Return to Essay on Money Outline

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