Great Britain. Parliament. House of Commons. Sele William Graham Sumner.

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barter currency was still allowed in the payment
of taxes. Silver now became scarce, and the
next stage was a new agitation in 1767 for paper

In 1768 the House resolved that ''in order to
prevent the unnecessary exportation of money, of
which this province has of late been so much

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drained," they will do without foreign superflui-
ties, and encourage the manufactures of this
province. The same doctrine has been preached
and avowed ever since, as the sum and essence of
political economy, but it has been a signal failure.
The colony was drained of money (silver) be-
cause it had adopted another legal tender, gold,
which, though the best money for large exchan-
ges, was so rated that it was the cheapest means
of payment. It alone therefore remained, and the
other metal was exported. It was not, however,
exported for nothing, and no resolutions could
make the people desist from using foreign super-
fluities which came back to pay for it. The same
violation of coinage laws was twice repeated under
the federal constitution, as we shall see below.
In the same year (1768) the Massachusetts Coun-
cil petitioned the House of Commons for relief
from the new tax laws, pleading the great scar-
city of money, which they ascribe to the balance
of trade being against them.

Mr. Hickcox, writing on the New York paper
money,* says that the colony traded in 1720 with

* Albany, 1866, page 21.

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Madeira, the West Indies, and England. He ex-
pressed still more explicitly the theory underlying
the above view on the subject. The trade '* to
the West Indies v^'^as wholly to the advantage of
New York, while that to Madeira was to our loss,
the province consuming more wine from thence
than could be purchased with its commodities.
The money imported from the West Indies was
not sufficient, however, to preserve a specie cur-
rency, a large amount being necessary to balance
the exchange with England."

The errors involved in this way of looking at
the matter were most clearly exposed in connec-
tion with the ** Bullion Report," and will be found
noticed in Chapter II.

In 1 763 Parliament declared any colonial acts
for issuing paper money void. Franklin wrote
a pamphlet in opposition to this act. He said
that gold and silver owe their value chiefly to the
estimation in which they happen to be among the
generality of nations and the credit given to the
opinion that they will continue to be so held.
'* Any other well-founded credit is as much an
equivalent as gold or silver." When exchange rose

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he thought that this was only an advance in ex-
change, not a fall in paper. In 1773 Parliament
allowed any bills issued by any colony to be a
tender at its treasury. In 1774 Massachusetts
was out of debt.

In 1775 representatives of the colonies of Con-
necticut and Rhode Island met the Congress of
Massachusetts to concert measures for the war.

It was agreed, as their money was paper and
they could not offer anything else, that this should
be allowed to pass in Massachusetts.


The colonies now went into the Revolutionary
War, many of them with paper already in circu-
lation, all of them making issues for the expenses
of military preparations. The Continental Con-
gress, having no power to tax, and its members
being accustomed to paper issues as the ordinary
form of public finance, began to issue bills on the
faith of the '* Continent,'' Franklin earnestly ap-
proving. The first issue was for 300,000 Spanish
dollars, redeemable in gold or silver, in three

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years, ordered .in May and issued in August,


Paper for nine million dollars was issued before
any depreciation began. The issues of the separ-
ate colonies must have affected it, but the popular
euthusiasm went for something. Pelatiah Web-
ster,* almost alone as it seems, insisted on taxa-
tion, but a member of Congress indignantly asked
if he was to help tax the people when they could
go to the printing-office and get a cartload of
money. In 1776, when the depreciation began,
Congress took harsh measures to try to sustain
the bills. Committees of safety also took meas-
ures to punish those who ^* forestalled " or " en-
grossed," these being the terms for speculators
who bought up for a rise. The tyranny of the
government was of course only a stimulus to the
private committees. It is natural to suppose that
malicious and criminal persons assumed the duty
of public regulators, and committed those acts
of violence and wrong which equal or surpass
anything of the kind under any despotism, but
such an error as a legal-tender act, enforced by

* Political Essays. Philadelphia, 1791.

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pains and penalties, is responsible for the second-
ary evils which are sure to flow from it* Web-
ster says of the paper : " We have suffered more
from this cause than from every other cause or
calamity. It has killed more men, pervaded and
corrupted the choicest interests of our country
more, and done more injustice than even the arms
and artifices of our enemy." The enemy, perceiv-
ing the terrible harm the Americans were doing
themselves, thought it well to help on the move-
ment. They counterfeited the bills and passed
them through the lines.

At the end of 1779 Congress was at its wits'
ends for money. Its issues had put specie en-
tirely out of reach, and the cause was in danger
of being drowned under the paper sea.

Webster says : *' The people of the States at
that time had been worried and fretted, disap-
pointed, and put out of humor by so many tender-
acts, limitations of prices, and other compulsory
methods to force value into paper money, and
compel the circulation of it, and by so many vain
funding schemes, declarations of promises, all
which issued from Congress, but died under the

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most zealous efforts to put them into operation
and effect, that their patience was all exhausted.
I say these irritations and disappointments had
so destroyed the courage and confidence of the
people, that they appeared heartless and almost
stupid when their attention was called to any
new propositions/'

The French alliance helped more by giving
means of procuring loans in Europe than by mili-
tary assistance. Congress promised to limit its
issues to $200,000,000, and tried a new form of
note ; also loan offices and lotteries. Over 350,-
000,000 were issued in all, but it is doubtful if
more than 200,000,000 were out at any one

In the spring of 1780 the bills were worth
two cents on the dollar, and then .ceased to cir-
culate. Specie now came into circulation, being
brought by the French, and also that expended
by the English passing the lines. The paper
was now worth more for an advertisement or a
joke than for any prospect of any kind of re-
demption. A barber's shop in Philadelphia was
papered with it, and a dog, coated with tar, and

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the bills stuck all over him, was paraded in the

On account of the peculiar character of Ameri-
can society, there are few family traditions of the
Continental currency ; but* the contemporary lit-
erature shows that the suffering it caused was
wide-spread and intense. It fell most heavily on
the most patriotic and most helpless. Phillips
quotes a letter addressed by a lady to the
*' Pennsylvania Packet" in 1779, saying that her
father had left her a competence which her
guardian had invested in real estate six years
before. He now proposed to pay her fortune in
paper. It is only a single instance.

" The gradual depreciation was urged as a
reason why the notes should not be redeemed at
par. It was said to operate as a tax ; as a most
equal tax, because it acted in proportion to the
amount held. The rich suffered largely on their
vast sums; the needy but slightly on their
scanty pittances. How fallacious these reason-
ings, with which the Congress and the people
solaced themselves, are, must be apparent.
Poor consolation it was to those who had been

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beggared confiding in the honor and in the hon-
esty of their country, to hear that their ruin
had merely been a gradual tax; to know that
from the operation of tender laws their property
had been taken away and given to others ; to
see the wealth accumulated by the dishonest
multitudes of contractors and the many defraud-
ers of that unhappy period, and to feel that it
had been plundered from their own coffers for
the aggrandizement of such people/' * The
trouble is that the government cannot make a
forced loan by legal tender issues, without giving
the opportunity for private individuals to take
*' forced loans " from their neighbors.

" If it saved the State, it has also polluted the
equity of our laws, turned them into enemies of
oppression and wrong, corrupted the justice of
our public administration, destroyed the fortunes
of thousands who had most confidence in it, en-
ervated the trade, husbandry, and manufactures
of our country, and went far to destroy the
morality of our people.'* t

♦ Phillips : Colonial and Continental Paper Currency, II. 175.
t Webster /. c, 175, note.

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It ought to be noticed that this paper was
vaunted as ** the safest possible currency," which
" nobody could take away."


December 31, 1781, the Bank of North Amer-
ica was chartered with a capital of $400,000. It
took its origin in a union of citizens of Philadel-
phia, formed in the preceding year, to supply the
army with rations. They were allowed to form
a bank, and, as it seems, issue notes to buy the
articles required. Congress ordered bills drawn
on American ministers abroad to be deposited in
the bank as a guarantee of payment. $70,000
in specie were subscribed in 1782 by individ-
uals, and the remainder by the government out
of the proceeds of a foreign loan. It issued
convertible notes, redeemable in Spanish dollars ;
but the people were slow to take them. Accord-
ing to the story given by Gouge, the Bank was
not over strong, and tried to keep up its credit
by parading and handling over its stock of silver.
However, it made large dividends, and was at-
tacked by a rival which it was obliged to absorb,


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and secondly by an effort to have its charter re-
pealed. The latter effort was successful so far
as the state charter was concerned. It went on
under the charter of the Continental Congress
,until 1 78 1, when it was re-chartered by Pennsyl-
vania. It exists yet.


In 1785 and 1786 an insurrectionary move-
ment, known as Shay's Rebellion, broke out in
New England. It was an insurrection of debtors
who were suffering from the collapse of the
currency and return to specie values. They
clamored for paper.

'* No desperately indebted people can long en-
dure a regular, sober government." This insur-
rection was put down by force, but Massachu-
setts passed a law delaying the collection of

In Rhode Island this movement was not
riotous, but took the form of a political move-
ment. The paper money party carried the elec-
tions in 1 786, and began a new period of this

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mania for their colony. ;i^ioo,ooo were issued
by a vote of the rural districts against the cities.
The bills were to be loaned on mortgage of land
for fourteen years. They depreciated at once.
Merchants refused to deal, and closed their
shops. The farmers retaliated by refusing to
bring produce to the cities, and thus the urban
and rural populations were pitted against one
another in a ridiculous warfare which brought
business to a stand-still. In Providence it was
agreed to enter into intercourse for necessaries
so far as parties could agree, and to borrow $500
to send abroad for grain. The farmers met and
petitioned the Assembly to enforce the penal
laws in favor of the paper money. By these
laws cases involving legal tender took precedence
of all others, and must be tried within three days
after complaint entered, without jury, and with
three judges a quorum. The decision was final.
The fine for the first offence was from £6 to
£10, and for the second offence, from £\o to
£^0. A protest by the representatives of the
large towns against this law was not allowed to
be recorded.

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John Trevett, of Newport, complained of John
Weedcn, a butcher, for refusing bank paper.
The "five judges agreed that the act was uncon-
stitutional. A special session of the Assembly
was convened, before which the judges were sum-
moned to *' assign the reasons and grounds" of
the late decision. Three judges came. Two
were sick. The hearing was postponed. A
test act was prepared and sent to the towns for
approval, but it went too far. Only five towns
approved. It proposed to disfranchise any one
who refused the bills at equality with metal.
With all this, money was so scarce that land
rents were paid in corn, and barter became com-

It was now determined to pay off the debt of
the colony, except the 4 per cents, one quarter at
a time, in the bills received for taxes. Any
holder of colony securities who did not come up
to take his notes within a set time forfeited his
securities. The whole debt was paid off in this
way within two years. Three months after it
was issued, the paper stood six for one gold.
The question of ratifying the new constitution

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now coming up, the paper money party was for
state rights, and the specie party for the federal

In the spring of 1787 there were twenty bills
in equity filed in court for the redemption of
mortgaged estates. '* The suitors came prepared
with paper money in handkerchiefs and pillow-
cases to redeem their lands." It was moved to
have the bills counted, and the tender recorded,
but the court held that it had nothing to do with
the money before rendition of judgment, nor was
it for them to be instrumental in proving a ten-
der. They refused to entertain any motion with
the latter intention. The Assembly next removed
four of the judges who declared the legal-tender
act unconstitutional. In June, 1787, the paper
was at eight for one. In 1 789 it was at twelve
for one. In September of that year the action of
the legal-tender act was suspended; October 12
the depreciation was legally fixed at eighteen for
one, and debtors were allowed to pay in produce.

If paper-money issues, tariff laws, and bounties
on exports can make a nation great and prosper-
ous, Rhode Island ought to have been the first

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State in the union in point of wealth, though the
last to enter it.

The historian, Arnold, apologizes for her dila-
toriness in joining the union by the extraordinary
degree of liberty her citizens had enjoyed, and
their jealousy of having it curtailed. They may
have had la Liberti in Rhode Island ; they did
not have liberty.

It appears that all the provinces were strug-
gling with paper issues during the period of the
old confederation. Specie was scarce in some,
and plentiful in others, according to the amount
of paper outstanding. The Congress of the con-
federation had not the power to tax, and its
efforts to obtain the consent of the States to its
fiscal legislation failed. Its certificates of in-
debtedness were worth only twelve or fifteen
cents on the dollar. A coinage law was passed
in 1786, but no coins of gold or silver were
struck. Copper coins were made, but they were
below standard and depreciated.

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One of the first acts of the Federal Congress
was to provide for the settlement of the out-
standing accounts. $21,500,000 were appor-
tioned to the States to assume their indebted-
ness, subscriptions being received in their paper
at a discount, but as the federal debt at once rose
in value, the transaction was very favorable to
the holders of State obligations. The amount
actually assumed was $18,271,814. At the
same time the States were credited with advances
made to the confederation, and charged their
quota of its expenditure. Thus some appeared
as creditors and others as debtors. The debtor
States never settled the account. The creditor
States were paid. The whole transaction was
criticised by Mr. Gallatin * as unwise and waste-
ful. It met with much opposition, especially from
the South, and there were always rumors of bar-
gain in connection with this act and the removal
of the capital to Washington.

* Sketch of the finances of the United States. 1796.

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We come now to the period in which the cur-
rency consisted more or less of bank-notes, nom-
inally convertible, issued by chartered banks.
The system to which it has most analogy is that
of the Scotch banks, although of these latter
only three are chartered, the others being joint-
stock companies and partnerships. We shall
have abundant proof that this system of free
banking requires, as its indispensable conditions,
moderation, sagacity, and scientific knowledge on
the part of the bankers. Without these qualities
in the managers, it is as wild as any scheme of
paper money. Men who believe that *' bank-
ing " consists in making paper issues and loaning
them, making them as large as possible and stim-
ulating them by all artificial means, and discour-
aging conversion as much as possible, may, as
we shall see, bring down more ruin on the com-
munity by this engine than by any other.

The Bank of North America had already been
founded. Its success in earning dividends led to
other similar enterprises. Massachusetts char-

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tered the Massachusetts Bank in 1784. Soon
after, a bank was chartered in New York and
another in Maryland.


In 1787 the Federal constitution was framed.
It contains a clause that no State shall " coin
money, emit bills of credit, or make anything but
gold or silver coin a tender in payment of debts.*'
The framers of the document thus fixed their con-
demation of the old paper system, and the people,
smarting under recent experiences, acquiesced.

It was proposed in the constitutional conven-
tion to give to Congress the right to emit bills
of credit, but the proposition Avas defeated nine
States to two. (Madison Papers, III. 1,344.)

Two questions have been raised under this
clause : i. Can a State authorize banks to do what
it cannot do itself? As the confederation had
already chartered the Bank of North America, it
does not seem that the *' bills of credit " were un-
derstood to cover bank notes. The courts have
held that a State may authorize bank issues when


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itself owns all the stock, the legislature appoints
the directors, the faith of the State is pledged for
the redemption of the bills, and they are receiva-
ble for public dues, provided the capital is paid in
and the bank may be sued. (Story, 4th ed., I.
227, note.)

2. Can the national government do what the
States cannot do under this clause ? The legal-
tender cases have recently decided this ques-
tion in the affirmative. Mr. Gallatin said, in
183 1, of Congress : *' As this body has no author^
ity to make anything whatever a tender in pay-
7nent of private debts ^ it necessarily follows that
nothing but gold and silver coin can be made
a legal tender for that purpose, and that Con-
gress cannot authorize the payment, in any
species of paper currency, of any other debts but
those due to the United States." This is only
important as showing the belief of prominent pub-
lic men on this point in earlier times. For them
it was a simple matter of course that Congress
could not pass a legal-tender act of any kind,
how much less one which should apply to exisjt-
ing contracts. The legal-tender decision did as

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great a wrong as the Dred Scott decision, and
the latter instance shows us that it is not useless
to discuss a constitutional question, even after the
court has decided it. It will not probably take a
war to overthrow the principle of the legal-tender
act, but it may take a national bankruptcy.


The first United States Bank was chartered by
Congress in 1791. Its capital was $10,000,000,
to be paid, one-fourth in cash, the rest in bonds
of the United States. The charter was to run
for twenty years. It issued no bills under $10.

Other banks were now formed very rapidly.
The following list is given by Gouge, though he
says that it is not full :

Banks Banks Banks

chartered. chartered. chartered.
1792 8 1799 3 1806 4

1793 3 iSoo 2 1807 9

1794 o 1801 3 1808 I

1795 5 1802 4 1809 3

1796 I 1803 IS 1810 8

1797 o 1804 10 1811 II

1798 . o 1805 4 1812 19

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In 1794 the first silver was actually coined,
the dollar weighing 416 grs., 1485 parts pure to
1 79 parts alloy. Its pure contents were, there-
fore, 371.25 grs. Gold was first coined in 1795,
the eagle weighing 270 grs., j^ fine, so that one
dollar contained 24.75 grs. pure gold. It will be
observed that where two metals are thus made
legal tender, and there is both a silver ** dollar "
and a gold '' dollar,'' the question of relative
value of the two metals is involved. It was as-
sumed in the above rating that silver was to gold
as 15 to I. We have had one instance before us
already when Massachusetts, in 1761, overrated
gold in the coinage and drove out silver. If the
rating should be correct at the time of passing
the coinage law, yet the fluctuations which are
continually taking place in the relative value of
the two metals would in time disturb the rela-
tions, and only one metal would circulate, viz., the
cheaper one. France has changed to a silver
currency only, and then to a gold currency only,
by these fluctuations since her mint law fixed

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the relation in the coinage. The ratio of 1 5 to i
was, at this time, unjust to gold. The actual
market value being \%\ to i. We shall have oc-
casion to notice the operation in this case.


The development of banking took place first
in New England. It was of the kind later known
as '* wild-cat " banking. The new financial
machine seemed so powerful and beneficent that
all that was necessary was to work it to the ut-
most. Notes under $5 were not allowed in
Massachusetts until 1805, but after that smaller
denominations were allowed, and finally notes
were issued as low as 25 cents, and, by the law
that paper drives out specie to the lowest denom-
ination to which it is issued, there was no specie
in the New England States. The stock of specie
in bank was insignificant, and was moved from
bank to bank to meet the inspectors' visits. The
downfall came in 1809. One bank in Massa-
chussetts had $40 in specie ; another nothing.
The system of subscribing to capital by notes
was, as it appears, universal. The Farmers


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Exchange Bank of Gloucester, R. L, founded in
1804, was probably the worst case. Its capital
was $1,000,000. Only $19,141.86 were ever
paid in, and of this the directors withdrew what
they paid in, leaving $3,081.11. One Dexter
bought out eleven of the directors for $1,300
each, paid out of the bank's funds. He borrowed
of the bank $760,265. When it failed it had
$86.46 in specie ; bills out unknown ; the com-
mittee estimated them at $580,000. South of
New England banks were fewer, and there was
no disturbance. Silver was plentiful in the West.
The exportation from Mexico was through the

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Online LibraryGreat Britain. Parliament. House of Commons. Sele William Graham SumnerA history of American currency: with chapters on the English bank ... → online text (page 3 of 22)