INFERENCES
DERIVED FROM THE THEORY

continued

Essay on Money IX

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

by John Witherspoon

Back to Top

Advantages of Bank Paper

The paper of banking companies has many advantages. It is considered as perfectly safe, because it can be exchanged for gold and silver at any time upon demand. Having this security at bottom, it is perfectly convenient for transportation, which indeed is common to it with all paper. In addition to this, it is considered as the principal business of all banks to give credit, which, though directly only in favor of commercial, is ultimately useful to many different classes of men.

I may upon this observe, that it is the duty of banking companies so to conduct their operations as to extend their regular credit as far as is safe for themselves. If instead of this, as has been supposed at least to have been done by some banks in Britain, they circulate their notes by agents, making purchases in different and distant places, that the sum issued may very far exceed the sum necessary to be kept or probable demands; they are in that case not serving the public at all, but using the money of other people to their own profit.

It is also to be observed, that the denomination of their notes should never be very small, it should indeed be as high as is consistent with such a general use as will bring in a sufficient profit. Very small denominations of paper do the greatest injury by entering into universal circulation, and chiefly affecting the industrious part of the community. It was a very great complaint against some banks in Scotland, that they brought down the denominations of their notes as far as ten shillings, and some of them even five shillings. If this was an evil, what shall we say of paper, as has been seen in this country, as low as one shilling, six pence, or even three-pence value.

It is a rule that will hardly admit of any exception, that the higher the denominations of paper bills, the greater the benefit and less the evil; and on the contrary, the smaller the denominations, the greater the evil and the less the benefit. High sums in paper obligations may perhaps change hands once a week, but a shilling of six-penny ticket may be in fifty hands in one day.(49.7)

Back to Top

Objection Against Banks

I must mention here what has been often objected against banks in America, which, if just, would, from the reasoning on the preceding part of this discourse, tend to their condemnation. It is that they have destroyed credit instead of extending it, and have introduced or given occasion to extensive usury.

I am not sufficiently informed to say how far this is really the case, but cannot help observing, that treating the matter theoretically, as I have all along done, and considering the nature of the thing, this does not appear to be a necessary consequence. One would rather think that the regular credit which is of or ought to be given by banks should prevent usury, by supplying all those who deserve to be trusted. Agreeably to this it was found in fact, that the institution of banks in Scotland lowered the interest of money, which indeed seems to be the natural effect of every such institution, from the increased circulation.

But if any instances more than before have happened of this kind, it may be by persons in extreme necessity applying to others who have credit with the bank, and who have so little conscientious scruple as to take advantage of their neighbor's poverty. If this is the case, it is only a particular abuse, or occasional bad consequence of a thing otherwise good and useful. It is not a just objection against any thing, that it may be or has been in some instances abused.

Besides, as it is the duty of every banking company to guard against this evil as much as possible, even by personal resentments, against those who make this use of their confidence, or it is an evil not out of the reach of legal punishment or general infamy. Wise and well executed laws against usury, would at least so far restrain it, as to make it an evil of little consequence.(50.9)

Back to Top

A defect in the system

But in examining the nature and operation of different kinds of paper, I must consider an objection of much greater importance, upon the principles of this discourse, against the paper of banks, or at least, a defect in their system, that seems to call for other measures in addition to it. This is, that banking companies give credit only so as to be serviceable to merchants, and those immediately connected with them, but do not extend it to husbandmen, or those who improve the soil, by taking mortgages for a considerable time; yet according to the theory above laid down, this is not only one of the advantages, but perhaps the chief advantage to be derived from a paper circulation of any kind.

Now, I admit, that the settlement and cultivation of the soil is the radical source of the prosperity of this country. It is indeed the source or the prosperity of every country, but comparatively more so of that of this country than most others. I also admit that credit, properly extended, to industrious persons in this way should be exceedingly beneficial. For this reason, and for this alone, Dr. Franklin and others perhaps judged right when they said, the country received great benefit from the loan-office paper of former times. I am also sensible, that it is not practicable nor proper for banking companies to give credit upon mortgages on distant lands. They being bound to prompt payment, must expect the same; therefore they are not to be blamed for refusing it in this form. For all these reasons, I do not take upon me wholly to condemn a measure in America, which would be unnecessary to improper in Europe.

We hear from every quarter, that is to say, from almost every state, a loud cry for paper money. Now, when there is a great and universal complaint, it is seldom without some foundation and though I have taken much pains in the preceding discourse to show that they mistake their own wants, that they do not want a circulation medium, but use that phrase without understanding its meaning; yet they certainly do want something. They want particularly credit; and they look back with desire to the former times when they had paper money, which, by its name itself, pointed out its nature and use, the notes being then called bills of credit. I will therefore proceed keeping a steady eye upon the principles above laid down, to state in what manner a loan-office may be established within moderate bounds, that shall render a service probably greater than the evils necessarily consequent upon it. (53.1)

Back to Top

Proposal

I would therefore propose, that any state that thinks it necessary, should emit a sum of suppose one hundred thousand pounds, and that the following rules should be laid down in the law, and invariably adhered to.

1. That not a shilling of that money should issue from the loan-office treasury, but upon mortgage of land to the amount of double the sum in value.

2. That it should not be a legal tender for any debts contracted or to be contracted, but receivable in all taxes within the state, and payable for the wages of Council and Assembly, and the fees and perquisites of all public officers, after it has been so received.

3. That at the end of twelve calender months, a sum precisely equal to the interest that had accrued of become due in that time, should be consumed by fire, and public intimation given of its being done. The same thing should be done every subsequent year.

4. That at no time any part of this money should be made use of in the payment of the public debts, but that which had been first levied in taxes. It would not be proper even to borrow from the stock for this purpose by anticipation. If these rules were observed, credit would be given to some persons, who needed and deserved it, to the amount of the whole sum. The bills current would be diminished in quantity every year so as not to load the circulation, which would have a sensible effect upon the public opinion, and indeed, from the nature of the thing, would increase their value, of rather confirm it from year to year. At the end of fourteen or fifteen years they would be wholly taken out of circulation, and that not by any tax laid on for the purpose, but by the hire of use of the money itself, and after all, the principal sum would be still due to the state in good money, which might bear interest for ever.

   It would be an important addition to this scheme, if no bills less than two dollars, or perhaps three, or five, should be emitted, as this would still keep silver at least in circulation on the above principles, all the good that can be produced by paper would be effected, vis.facilitation commerce, and giving credit; and as little of the evil as possible, because the quantity would be fixed and moderate at first, and continually decreasing, so as at last to vanish altogether; and then another emission of the same kind might be made, if the utility of the first should recommend it. (55.2)

Back to Top

Answer to Objection

Perhaps it will be said, that this money not being a legal tender, would not answer the purpose of borrowers by paying their debts, nor get at all into circulation. To this I answer, that it would not answer the purpose of those who want to pay their debts with half nothing, and cheat their creditors; nor do I wish to see any thing attempted that would produce that effect. But I affirm, that it would get better into circulation than by a tender law, which creates general and just suspicion.

Tender laws, as has been already proved, may be made use of by deceitful persons to do particular acts of injustice, but are not sufficient to procure general circulation, nor to excite and reward industry, without the opinion and approbation of the public. Such money as I have described would excite no alarm, it might easily be tried. It would, in my opinion, certainly be tried, for all would know that it would pay every tax to government, and even borrowers of large sums might make trial of it, without any risk at all, because if it would not answer their end, they might after a few months, repay it, and take up their mortgage. But I cannot help thinking that the principles of it are so just, and the plan so certain, that all understanding persons would perceive and approve it. (56.1)

I must here take the occasion and the liberty of saying, that it were greatly to be wished that those who have in their hands the administration of affairs in the several states of America, would take no measures, either on this, or any other subject, but what are founded upon justice, supported by reason, and warranted to be safe by the experience of former ages, and of other countries.

The operation of political causes is as uniform and certain as that of natural causes. And any measure which in itself has a bad tendency, though its effects may not be instantly discernable, and their progress may be but slow, yet it will be fallible; and perhaps the danger will then only appear when a remedy is impossible.

This is the case, in some degree, with all political measures, without exception, yet I am mistaken if it is not eminently so with respect to commercial dealings. Commerce is excited, directed, and carried on by interest. But do not mistake this, it is not carried on by general universal interest, not even by well informed national interest, but by immediate, apparent, and sensible personal interest.

I must also observe that there is in mankind a sharp-sightedness upon this subject that is quite astonishing. All men are not philosophers, but they are generally good judges of their own profit in what is immediately before them, and will uniformly adhere to it. It is not uncommon to see a man who appears to be almost as stupid as a stone, and yet he shall be as adroit and dextrous in making a bargain, or even more so, than a man of the first rate understanding, who, probably for that very reason, is less attentive to trifling circumstances, and less under the government of mean and selfish views. As to currency, which has been our general subject, if coins of any particular species happen, as is sometimes the case, to pass at a rate, ever so little higher, in one country, or corner of a country that another, thither they will immediately direct their course; and if the matter is not attended to, nor the mistake rectified, they will be all there in a very short time, and the place which receives them must bear the loss. (57.4)

Continue to Essay on Money X for Summing Up, Conclusion, and Biographical Note.

Return to Essay on Money Outline

Return to Kidogo's World

Kidogo's World: http://www.sonnet.com/usr/kidogo/
This Website designed by WebMaster: Jean Westphal, kidogo@sonnet.com
Background designed by Bill Lizasoain
Background Trademark 1996 Jean Westphal

NOTE. Views expressed on this web site
are not necessarily the official views
of The Constitution Party.
The official positions of the Constitution Party
are reflected only in its platform and in resolutions
passed by the National Committee.

Please send comments, suggestions, or requests for links to: kidogo@sonnet.com.
(Please put "kidogo's witherspoon" in the subject line.)