INFERENCES
DERIVED FROM THE THEORY

continued

Essay on Money VIII

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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Evil done by paper

Let us next consider the evil that is done by paper. This is what I would particularly request the reader to pay attention to, as it was what this essay was chiefly intended to show, and what the public seems but little aware of. The evil is this: All paper introduced into circulation, and obtaining credit as gold and silver, adds to the quantity of the medium, and thereby, as has been shown above, increases the price of industry and its fruits.

This consequence is unavoidable, and follows as certainly from good paper as bad, or rather more certainly, for the medium is increased only by that which obtains credit.(43.10)At the same time this consequence is local, because the paper does not pass among other nations, and therefore it works against the interest of the people who use it, and necessarily draws off their gold and silver, which must be made use of in all foreign payments.

Men may think what they please, but there is no contending with the nature of things. Experience has every where justified the remark, that wherever paper is introduced in large quantities, the gold and silver vanishes universally. The joint sum of gold, silver and paper, current, will exactly represent your commodities, and the prices will be accordingly. It is therefore as if you were to fill a vessel brim full, making half the quantity water and the other oil, the last being specifically lightest will be at the top, and if you add more water, the oil only will run over, and continue running till there is none left.

How absurd and contemptible then is the reasoning which we have of late seen frequently in print, vis. the gold and silver is indeed going away from us, that is to say, if the balance of trade is much against us, the paper medium has a direct tendency to increase the evil, and send it away by a quicker pace.(44.10)

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Doubtful paper

I have said, that this consequence follows from all paper, as such, good and bad, so far as it enters into circulation; but every one must perceive that there is a peculiar, and indeed a different evil to be feared from paper of a doubtful kind, and especially from that which being doubtful is obliged to be supported by coercive laws. This must raise general suspicion, and consequently bring a stagnation of commerce, from universal and mutual distrust.

For the same reason it must annihilate credit, and make every cautious person lock his real money, that is, gold and silver, as he cannot tell but he may be cheated in the repayment. This evil is very extensive indeed, for it makes people suspicious, not only of what is, but what may be. Though the injury should be but partial, or inconsiderable at present, it may become wholly ruinous by some unknown future law.(45.6)

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Resolution of the question of paper money

Hence it may be seen, that the resolution of the question, whether it is proper to have paper money at all or not, depends entirely upon another, vis. whether the evil that is done by augmenting the circulating medium, is or is not overbalanced by the facility given to commerce, and the credit given to particular persons, by which their industry and exertions are added to the common stock.

As it is upon this that the question depends, we shall find, that as the circumstances of a nation may be different, it may be for or against its interest to use a paper medium. If any nation were in such circumstances(46) as that credit were either not necessary or easily obtained; if the country were fully settled, and the inhabitants fully employed in agriculture, manufacturing. and internal commerce, with little foreign trade, any addition to the true money would be unnecessary or pernicious.

This is probably the state of China at present, perhaps in some degree also of France. On the contrary, if a nation had an extensive and complicated commerce, and extending of credit, might be highly beneficial. I do not pretend to such exact a knowledge of the state of this country, or the different parts of it, as to judge with absolute certainty of what is necessary or would be useful to it, but am inclined to think that there must be something in the state of things in America that makes it either more necessary or more expedient to have paper here than in the European states.

We are assured that in former times many of the states, then colonies, thought it a privilege to be allowed to strike paper money; and we are told by persons of good understanding, that it contributed to their growth and improvement. If this was the case, I am confident it was chiefly because it was emitted on the way of a loan-office, and by giving credit to husbandmen, accelerated the settlement and improvement of the soil.

This question I do not take upon myself to decide, and therefore in what follows, desire I may be considered as speaking only hypothetically, the rather, that at present the inclination after paper of some kind or another seems to be so strong, that it would be in vain to withstand it.(47.1)

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Principles on which it ought to be conducted

If therefore paper is to be employed in circulation, we may see from what has been said above, what are the principles on which it ought to be conducted, the ends that ought to be aimed at, and the evils that ought to be avoided. The ends to be aimed at are, the facilitating of commercial transactions, and extending of credit to those who are likely to make a proper use of it.

The plan should be so conceived, as that the increase of the circulating medium should be as little as possible, consistently with these ends. It should be perfectly secure, so as to create an absolute confidence. And as it is of the nature of an obligation, no force whatever should be used, but the reception of it left entirely to the inclination and interest of the receiver.

It may be safely affirmed, that any deviation from these principles, which are deduced from the theory above laid down, will be an essential defect in the system. If we enquire what sort of paper will best answer this description, we find that there is no other sort used in Europe than that of banking companies. The government stamping paper to pass current for coin is unknown there.

Notwithstanding the immense sums which have been borrowed by the English government, they always prefer paying interest for them, to issuing paper without value for money. The only thing resembling it in the English histories, James the Second coining half metal and affixing a price to it by proclamation; a project contemptible in the contrivance, and abortive in the execution. This seems to be a considerable presumption, that the measure is upon the whole not eligible.(48.1)

Continue to Essay on Money IX to discover the advantages of Bank Paper.

Return to Essay on Money Outline

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