a treatise on currency & banking

8/7/2019 A treatise on currency & banking

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GIFT OFMICHAEL REESE


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GRIGG & ELLIOT,JYo. 9 JVorth Fourth Street,

HAVE FOR SALETHE FOLLOWING WORKS.

THE PRINCIPLES OF FREE TRADE,ILLUSTRATED,IN A SERIES OF SHORT AND FAMILIAR ESSAYS,

BY CONDY RAGUET, ESQ.This volume, of which the first edition has been exhausted, com-

prises 432 pages octavo, of essays, selected from the Banner of theConstitution, which was published during the years 1830, 1831, and1832, and which is now out of print, embracing examinations of allthe different positions taken by the advocates of a high tariff, duringthe contest which was terminated by the compromise act, and whichare now likely to be revived in adjusting the tariff for the year 184 2Price, in boards, $1 50.

THE FINANCIAL REGISTER.This work, in two vols. octavo, each of 416 pages of closelyprinted matter in double columns, was published as a periodicalunder the editorship of Condy Raguet, Esq. between July 1837and January 1839, and was designed as a documentary historyof the commercial crisis of that period.The following- notice of its contents appeared in one of thePhiladelphia papers in February, 1839.

History of the late Money Crisis. The Financial Register, issuedin numbers during the last eighteen months, is now complete in twooctavo volumes, closely printed in double columns, at the price of fivedollars. As a complete documentary history of the late money crisisin the United States and England, it is of high value, and as a bookof reference embraces a large body of English publications connectedwith banking and currency which are not easily procurable in thiscountry. A perusal of the contents will show the great and singularvalue of the work to bankers, statisticians, and inquirers in financialscience generally. We therefore give the following particulars, as thebest mode of noticing a publication, the diversified worth of whichwould not readily be imagined without such an index.The celebrated Bullion Report of 1810.


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326The Trade of Banking in England, embracing the substance of theevidence taken before the Secret Committee of the House of Com-mons in 1832, on the question of renewing the Charter of the Bankof England, digested and discussed under appropriate heads, togetherwith a summary of the Law applicable to the Bank of England, to

private banks of issue and joint stock banking companies, by MichaelJ. Quinn, Esq., of Lincoln's Inn, Barrister at Law. The cost of theLondon edition of this work if imported, would be five dollars.English pamphlets on the late money crisis, by J. Horsley Palmer,Samuel Jones Lloyd, Col. Torrens, Samuel Ricardo, W. Bennison, andDavid Salomons.Numerous statements of the affairs of the Bank of England downto a late period, of private banks and of joint stock banks.Statements of the affairs of the three American houses as published

at the time of their suspension in England in 1837.Annual Report to the stockholders of the Bank of France of Janu-ary, 1837, with a history of the Bank, and the prominent features ofits charter.

Recent Act of the British Parliament modifying the usury laws.Mr. Biddle's six Letters to the Hon. John Q. Adarns; also his Let-ters to the*New York Board of Trade, and the New Orleans banks.Statements of the affairs of the late Bank of the United States du-ring the twenty years of its existence, and of the Pennsylvania Bankof the United States during the years 1836 and 1837.Summary statement from official documents, of the condition of allthe Banks in the United States, at various periods from 1811 to 1838.

Regular monthly statements of the New York Banks during thesuspension.

Partial statements at different periods of some of the banks of allthe states.The Journal and proceedings of the different Bank Conventionsheld at New York and Philadelphia in reference to the resumption ofspecie payments.

Cotton, numerous tables of exports, for particular periods, consump-tion of, in Great Britain from 1810 to 1837, total annual growth in theUnited States, from 1824 to 1838.The Financial measures of the General Government, commencingwith the passage of the law of 23d June, 1837, for the distribution ofthe surplus revenue the specie circular of llth July of same yearthe supplemental circular of llth July. The proclamation of the pre-sident convoking congress in extra session his message to the same

all the public laws passed at that session for the issue of treasurynotes for the postponement of the fourth instalment of the revenuefor the postponement of the duty bonds and other purposes the twosub-treasury bills as they passed the senate at the different sessions,and were rejected by the house, with the yeas and nays of each housethereupon; history of this measure when first introduced in congressby General Gordon in 1834.The Essays, eighteen in number, which appeared in the NationalGazette early in 1837, under the signature of "An Examiner."

Reports made to the Legislature of Massachusetts on the affairs of


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327The Lafayette, The Commonwealth, Franklin, Kilby, Roxbury, andNorfolk Banks.

Notices of numerous legal decisions in various partfr of the UnitedStates, to which banks and other corporations were parties, involving-new and most important doctrines.Judge King's decision in the case of Kuhn vs. The Bank of theUnited States.Periods at which the banks in different states resumed specie pay-ments.Sales of stock weekly, at Philadelphia and New York, from July,

1837, to December, 1838.Rates of Exchange at New York, foreign and domestic, weekly,during the same period.Fluctuations in the New York Stock market monthly during theyear 1837, of the principal stocks, foreign and domestic, usually soldthere.A copy of the New York general banking law, and of the articlesof association under It, of the American Exchange Bank, The Me-chanics' Banking Association, and The North American Trust andBanking Company.Table of Imports and Exports from 1789 to 1838 inclusive.A list of the names of the members of the last congress, and astatement of the periods at which elections are held in all the stater.Chancellor Kent's opinion on the law of corporations.Notices of many of the loans effected by different states.Dr. Robert Hare's pamphlet on the currency.Dr. M'Vickar's pamphlet on banking, first published in 1827.General Jackson's two Letters to the editor of the Globe of 9th aid23d July, 1837, on the financial policy of the country.The Secretary of the Treasury's Reports to congress, at the open-ing of the present and the preceding sessions of congress, with suchparts of the president's message as relates to the finances.Annual Report of the director of the Mint of 13th January, 1838.

History of the money crisis of 1818.Yeas and nays in the two houses of congress upon the charteringof a National Bank during the extra session.Dividends declared by the banks of New York and Philadelphia, atdifferent periods within the last eighteen months, with occasionalnotices of the money market.Quotation of the prices of American Stocks in the London market,and of cotton in the Liverpool market, at many different periods.Mr. Wright's Report to the Senate of the United States on the col-lection of the public revenue.Mr. Rives' substitute for the Sub-Treasury bill offered at the lastsession of congress.Mr. Wright's Report to the Senate on Mr. Webster's resolution

respecting the employment of state banks.Copy of the Treasury instructions of 20th September, 1835, to thedeposit banks, recommending an extension of discounts on the publicmoney.

Report of the Bank Commissioners of Mississippi upon the condi-


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328tion of the Brandon Bank, and an account of various proceedings inthat state in reference to the state of the currency.

Proceedings of the New Orleans-banks at various periods, respect-ing a resumption of specie payments.A copy of this work should be in every library and bank forfuture reference. The number of copies for sale is only 300.The price is $5, half bound.

QUINN'S TRADE OF BANKING.The Trade of Banking in England, embracing the substance of theevidence taken before the secret committee of the house of commons,in 1832, on the question of renewing the charter of the Bank of Eng-land, digested and arranged under appropriate heads. Together witha summary of the law applicable to the Bank of England, to privatebanks of issue, and joint stock banking companies. To which isadded an Appendix. By MICHAEL J. QUINN, Esq., of Lincoln's Inn,Barrister at Law. London, 1833.This work, the English edition of which fills a volume of up-wards of 400 pages small octavo, and costs in London fifteenshillings sterling, is republished entire in the second volume ofthe Financial Register, thus presenting to the American readerat a comparatively small cost, a work of great value, as contain-ing a condensation of what in the minutes of evidence to whichit refers, occupies a very large and expensive quarto volume.

ALSO,THE FREE TRADE ADVOCATE,AND JOURNAL OF POLITICAL ECONOMY.

In Two Volumes, Octavo.Published as a periodical in 1829, and edited by

CONDY RAGUET, ESQ.

ALSO,THE SECOND VOLUME OF THE EXAMINER,

(THE FIRST BEING OUT OF PRINT:)Published as a periodical between August 1834 and August 1835, and

Edited by CONDY RAGUET, ESQ.


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A TREATISEON

CURRENCY BANKING.

CONDY RAGUET, LL.D.,MEMBER OF THE AMERICAN PHILOSOPHICAL SOCIETY; PRESIDENT OF THE CHAMBlOF COMMERCE OF PHILADELPHIA; LATE CHARGE D'AFFAIRES OF THE UNITEDSTATES AT THE COURT OF BRAZIL, AND AUTHOR OF "THE PRINCIPLESOF FREE TRADE ILLUSTRATED."

"It is the interest of every country that the standard of its money, once set-tied, should be inviolably and immutably kept to perpetuity. For wheneverthat is altered, upon whatever pretence soever, the public will lose by it." Men in their bargains contract, not for denominations or sounds, but for theintrinsic value. LOCKE ON MONET.

Secontr

PHILADELPHIA:GRIGG & ELLIOT, BOOKSELLERS, No. 9 NOilTH FOURTH STREET,

1840.


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Entered, according to act of congress, in the year 1839,BY CONDY RAGUET,

In the office of the clerk of the District Court of the Eastern Districtof Pennsylvania.

T. K. & P. Q. COLLINS, PRINTERS,No. 1 Lodge Alley.


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TO

CLEMENT C. BIDDLE, ESQ.AS A MARK OF RESPECT,

DUE TO AN ENLIGHTENED POLITICAL ECONOMIST, ANDAS A TESTIMONIAL OF A FRIENDSHIP,

COMMENCED IN CHILDHOOD, CONTINUED WITHOUT INTERRUPTIONFOR MORE THAN FORTY YEARS, AND STRENGTHENED BY A HAR-MONY OF OPINION ON MOST OF THE POLITICAL SUBJECTS THATHAVE OF LATE DIVIDED THE PEOPLE OF THE

UNITED STATES,AND ESPECIALLY ON THOSE OF

CURRENCY AND BANKING,THIS WORK IS, WITH SENTIMENTS OF THE

MOST AFFECTIONATE REGARD,

DEDICATED BY

THE AUTHOR.


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TABLE OF CONTENTS.

BOOK THE FIRST.OF THE LAWS WHICH REGULATE A CURRENCYCOMPOSED ENTIRELY OF THE PRECIOUS ME-TALS.

CHAPTER I. Of the intrinsic value of the precious metals,and of their adaptation to the purposes of a circulatingmedium, ..--.....g

CHAPTER II. Of the distribution of the precious metalsthroughout the commercial world, - - - - 5

CHAPTER III. On the relative value of gold and silver, 8CHAPTER IV. On the balance of trade, or the causes which

occasion the transmission of the precious metals from onecountry to another, - - - - - - -12

CHAPTER V. On the principles of exchange, - - -25CHAPTER VI On the steadiness of trade in countries em-

ploying a metallic currency*------ 36CHAPTER VII. Of the different kinds of depreciation towhich a metallic currency is liable, - - - - 42CHAPTER VIII. On the " credit system," or the influence

of credit in promoting national wealth, - - - - 48CHAPTER IX. On the laws which regulate the hire of

capital, and on the impolicy of usury laws, - - 53CHAPTER X. Examination of the common opinion re-

specting the sinking of capital, 58


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Vi TABLE OF CONTENTS,

BOOK THE SECOND.OF THE LAWS WHICH REGULATE A MIXED CUR-RENCY COMPOSED OF THE PRECIOUS METALS,AND OF PAPER CONVERTIBLE INTO COIN ONDEMAND.

! CHAPTER I. Of banks of deposite, of banks of discount,and of banks of circulation,------ 67

CHAPTER II. Of the operation of banks of circulation, - 73CHAPTER III. Of the principles by which the profits ofbanks of circulation are determined, - - - - 80

CHAPTER IV. Of the safest and most profitable mode ofinvesting the capitals of banks of circulation, - - 84

CHAPTER V. Of the legitimate operations of banks ofcirculation, ---------90CHAPTER VI. Examination of the common opinion thatbanks create capital, - 94

CHAPTER Vll.^-On the strict convertibility of bank notesand credits, - - ~ ... 100

' CHAPTER VIII. Of the various modes resorted to by somebanks to augment their dividends, - - . - - 104CHAPTER IX. Of the creation of banks without capitals,

or of fraudulent banks, - - - - - -110CHAPTER X. Of the effects of banks dealing in exchange, 114CHAPTER XI. Examination of the common opinion that

the establishment of banks in the western states uponeastern capital, is beneficial to thuse states, - - - 124

CHAPTER XII. On the circulation of small bank notes, - 127


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TABLE OF CONTENTS. vii

BOOK THE THIRD.OF THE LAWS WHICH REGULATE A CURRENCYCOMPOSED ENTIRELY OF INCONVERTIBLEBANK PAPER.

* CHAPTER I. Of the career usually run by banks of circu-lation previous to a general stoppage of specie payments, 134

CHAPTER II. Of the fluctuations in the market price ofspecie and of bills of exchange under an inconvertiblepaper currency, - - - - --.- -140

v CHAPTER III. Of the true character and effects of a gene-ral suspension of payments by the banks, and their obli-gations under it, - - - - - - - 148

4 CHAPTER IV. Of the criminality of banks in augmentingtheir issues after a suspension of payments, - 154

CHAPTER V. Of the cost to a community, pecuniary andmoral, of banks of circulation, compared with the bene-fits derived from them, - - - - - - -158

CHAPTER VI. Of the different kinds of depreciation towhich an inconvertible paper currency is liable, - - 168

BOOK THE FOURTH.CHAPTER I. Examination of the question, of what does acurrency consist 1 173CHAPTER II Examination of the question, of what does a

currency consist? continued, - - - -177


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Viii TABLE OF CONTENTS.CHAPTER III. On the importance of having uniform peri-

odical statements of the condition of the currency, - 188CHAPTER IV. On the impolicy of adhering to our present

mint proportions between gold and silver, - - -194CHAPTER V. On the superiority of the New York generalbanking law, over the present banking system, - - 200

APPENDIX.A. On the relative value of gold and silver, - 207B. History of the gold coinage of the United States, - 218C. Condensed statement of the condition of all the banks

in the United States, at different periods, - - 242D The New York general banking law, - - - 243E. Letter from the author to J. W. Cowell, Esq. - - 254F. Table of imports and exports, from 1789 to 1839, - 258G. Essay on unlimited liability, by James Cox, Esq., - 260H. Report to the senate of Pennsylvania on the money

crisis of 1818, 289I; Prices of state stocks in London at two different pe-

riods, 306J. Extract from the annual report of the comptroller of

New York, of January, 1840, upon the generalbanking law, with abstracts from two recents laws, 308


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PREFACE.

THE suspension of specie payments by all the banksin the United States, south of New England, in theyear 1814, and of all, with a very few trifling excep-tions, in the year 1837,

has strongly impressed thepublic mind with the belief that there is somethingdefective in the present banking system of this conn-try; and it is not, perhaps, venturing too much toassert, that there are now elements at work, whichwill ultimately overthrow the whole fabric, unlessthose who have the power to remedy the evil, shallintroduce the reforms which can alone render a repe-tition of such a calamity impossible.

It must be evident to every observant mind, thata dislike to hear the truth, when opposed to one'sinterests or prejudices, is the principal cause of alarge portion of the mischievous errors which sogenerally prevail. Men of education and capacity,who are best qualified to investigate and understandthe important principles which belong to the scienceof public economy, are too apt to view them as ofno account, or to despise them when they come inconflict with their purses, or with their political pro-motion; and hence that knowledge, which is the most


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X PREFACE.entitled to regard, because most intimately connectedwith the prosperity of a country, is of all others themost neglected. I assert it, and, in so doing, I thinkI do not overestimate its value, that political economyis the most important of sciences; and if its practicalbranches were introduced as a study into all ourcolleges and principal schools, it would do moretowards exempting the country from erroneous anddestructive legislation, than any other study to whichthe attention of our youth could be directed.Of these practical branches, the science of bankingis one, but it is one, to the attainment of a knowledgeof which there is no " royal road," any more thanthere is to any other species of learning. He whowishes to understand it, must study and reflect, andthis not with the feelings of a partisan, but in the truespirit of philosophy, unbiassed by self-interest, or byany other consideration than a pure love of the truth.The

rapidstrides which the banking system

has beenmaking of late in France and other countries ofEurope, accompanied, as it has been, by indicationsof unsoundness, in Belgium and elsewhere, givesjust ground for apprehension, that the same spiritwhich has characterised the management of most ofour institutions, as well as those of Great Britain,producing alternate expansions and contractions ofthe currency, to the great injury of the public, willalso there extensively prevail. In such event, thecheck to over-issues in this country and England,which now exists from the reaction of the metalliccurrencies of continental Europe, would be greatlydiminished, and in consequence of it, inflations and


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PREFACE. Xiconvulsions hitherto unknown in the commercialworld, because extended over a wider field, wouldmost certainly overtake us all. That the interests ofa country aje best to be promoted by a stable cur-rency, precisely as they are by a fixed standard ofweights and measures, will hardly be disputed; andif it can be shown, that a defective, or mismanagedbanking system, produces exactly the same resultsupon the pursuits of industry, and the property ofindividuals, as would the decrees of a despot, whoshould alter, at his pleasure, without any previousnotice, as often as he thought it expedient, the weightof the pound, or the length of the yardstick, it is tobe hoped that there is not a patriot in the land, whowould hesitate to assist in the entire eradication ofsuch a monstrous evil. That such is the effect of ourpresent system, as it has been of late conducted, mustbe obvious to all who have closely examined itsoperations, and hence the necessity, before it is toolate, of an application of the appropriate remedy.The author of this treatise in offering it to thepublic, has no private ends to promote. He has beenfor twenty years a student of the science which heproposes to discuss, and has during that time in somereports to the senate of Pennsylvania, and in manydetached publications, presented his views in relationto currency and banking; and if in the present volumethere should appear here and there an expressionfamiliar to the reader from former acquaintance, hemay be assured that not a phrase has been employedas original, which is not his own property. Heknows that in his opinions respecting the influence


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Xii PREFACE.and operation of banks of circulation, upon the publicprosperity, he differs from some of his personal friends,and from many others engaged in the managementof such institutions, for whose intelligenceand purityof character he entertains the highest respect. Butthe truths of science cannot be forced to accommodatethemselves to man's imperfection or interests. Ifwhat he advances be not such truths, they can beeasily refuted, and he invites the severest criticism tobe applied to his doctrines, in order that their soliditymay be tested, and if found to be false or unstable,that their true character may be exposed. If, on theother hand, the principles which, he asserts, be inreality, as he honestly believes them to be, incontro-vertible truths, he will not do any of his readers theinjustice of supposing, that they would reject them,because they are not profitable.With these preliminary remarks, the author willbriefly state, that the plan he has adopted, is one whichhe thinks the best calculated to simplify the subjectto those who have not heretofore made it a study.He has divided the volume into four books. Thefirst treats of the laws which regulate a currencycomposed entirely of the precious metals; the second,of those which regulate a currency composed of coinand convertible paper united; the third, of thosewhich regulate an inconvertible paper currency;whilst the fourth treats of some miscellaneous matters,which could not have been well comprised undereither of the former heads.

In the language and style of the work, the authorhas sought rather to render his positions intelligible


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PREFACE. xiiito practical men, than to appear to be scientific, andhence the reader will find some familiar expressions,which have been purposely adopted, because everybody could understand them.

April 15, 1839.


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PREFACE.

NOTE TO SECOND EDITION.THE stoppage of specie payments referred to

above, in 1814, commenced in Baltimore about the27th of August, soon after the battle of Bladensburghand the capture of Washington, which events tookplace on the 24th of that month, and was followedby Philadelphia on the 30th, and by New York onthe 1st of September. A general resumption tookplace on the 20th of February, 1817.The second stoppage commenced at New York onthe 10th of May, 1837, and was followed at Phila-delphia on the llth, at Boston and Baltimore on the12th, and in all other places in quick succession.Resumption took place at New York on the 9th ofMay. In Boston, Philadelphia, and places further,south it was delayed until the 13th of August.

Since the publication of the first edition of thisbook, all the banks in the United States, south ofNew York, which pretended to pay in specie, sus-pended payment again. This event took place firstin Philadelphia, on the 9th of October, 1839, andwas followed by the rest in rapid succession, leavingonly New York and New England in the enjoymentof a convertible currency. This suspension has con-tinued to this time, arid is expected to continue until1841.

June 1, 1840.


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A TREATISE ONwhich commerce is carried on in a country wherethere are no bank notes or paper money of any kind,and where gold and silver alone constitute the cur-rency; and, as it would be carried on in every country,if there did not exist paper money.

CHAPTER I.OF THE INTRINSIC VALUE OF THE PRECIOUS METALS,AND OF THEIR ADAPTATION TO THE PURPOSES OFA CIRCULATING MEDIUM.GOLD and silver, it is well known, are produced invarious parts of the globe, at the cost of labor and

capital, precisely in the same manner that iron, lead,and other metals are produced; and with regard toall the mining countries, they constitute, if not theonly, at least the most inviting product of industry towhich a portion of the land, labor, and capital, oftheir inhabitants can be applied. As products, there-fore, of industry, they possess an intrinsic value, likeall other commodities, dependent upon the cost ofproducing them; that is, upon the amount of the rentpaid to the owner of the land for the privilege ofmining them, the amount paid for the wages of thelaborers employed in digging and smelting the oreand in refining the metal, and the amount of the or-dinary profits on capital invested in the enterprise.Were this not the case, it is evident that mines wouldnot be worked, for no proprietor of land or capitalistwould embark in an undertaking that would lead tocertain loss, the object of mining not being to producegold and silver, but to produce gold and silver of avalue greater than that of the capital expended in itsproduction. This much is premised, in order that the


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CURRENCY AND BANKING. 3reader may have at the outset a clear view of thisfundamental truth in political economy, that gold andsilver being products of industry, possess a value asreal and substantial as that which belongs to anyother commodities; not indeed founded upon the basisof convention, as some people imagine, but upon theirwell known applicability to various purposes of uti-lity and ornament for which no other materials pos-sess equal qualities, and which renders them on thataccount universally sought for. They are thereforenot mere representatives of wraith as many personsfancy, but real wealth itself to the full extent of theirvalue.What proportion of the actual value of gold andsilver, as exchangeable for other commodities, is dueto their applicability to objects of utility and orna-ment, and what proportion to their fitness for the pur-poses of a circulating medium, now that they are ap-plied to that purpose, it would not be easy to deter-mine; nor is it at all necessary to this investigation thatit should be determined. It is sufficient for us toknow, that almost every individual who can aiford asilver spoon, or a gold watch, or a plated or gilt orna-ment, will have one; and that if gold and silver wereto be wholly disused as money, they would retain alarge share of their present value for the purpose ofbeing converted into plate and other objects of manu-facture, and in process of time, would again rise to thecost of their production, which would be an indispen-sable requisite to ensure a future fresh supply.

It will, perhaps, remain for a future day to developeall the reasons why gold and silver have become souniversally adopted by all civilised people as the me-dial commodity, that is, the commodity in exchangefor which any other commodity can almost always bereadily had. Those with which we are already ac-quainted, are the following:

1. Their uniformity of value, varying from oneyear to another, and from one period of years to an-


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4 A TREATISE ONother, less than jany other known commodities, andtherefore well adapted to be the commodities of con-tracts and obligations payable at a future day.

2. The universality of this uniformity of value, bywhich they serve not only as standards for comparingprices at different periods of time, but prices in diffe-rent countries at the same time.

3. Their convenient portability, possessing a greatvalue in a small bulk, and yet a bulk not too small forall practical purposes.

4. Their divisibility into pieces of any weight, andof the most exact quantities, and their convertibilityby fusion back again into larger masses without loss.5. Their malleability and toughness, which renderthem not liable to break.6. Their susceptibility of receiving impressions as

coins.7. Their uniformity of physical quality, pure goldor silver being the same at all times and at all places,and thus unlike most other metals and commodities

which have different degrees of excellence.8. Their capacity of admixture with alloy whichrenders them as coins less destructible by wear and

tear, and of their being again separated from it withvery little loss.

9. Their durability, not being easily destroyed byfire, and not at all by rust.

10. Their clear sound when dropped upon a hardsubstance, by which they can be known from basemetals, and be thus distinguished from counterfeits.

1 1. Their specific gravity, which differs from thatof other metals of the same bulk, and thus rendersthe detection of counterfeits easy by a practised hand.The beauty of the metals adds to their value forpurposes of utility and ornament, but perhaps not totheir value as money; and hence I have not embracedthat quality in the foregoing enumeration.


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CURRENCY AND BANKING.

CHAPTER II.OF THE DISTRIBUTION OF THB PRECIOUS METALSTHROUGHOUT THE COMMERCIAL WORLD.ALL the gold and silver annually produced in thefour quarters of the globe, and not required for con-

sumption in manufactures or for currency in the coun-tries where produced, are in the constant course of dis-tribution throughout the commercial world in ex-change for commodities which are more desirable tothe producers than the metals themselves; and whenthus distributed, they are liable in common with thatportion of the pre-existing mass which retains theform of coin and bullion, to such further changes ofplace as the wants and circumstances of each particu-lar country may require. In these distributions, eachcountry does not equally participate, but each drawsto itself that proportion of the whole quantity whichis called for by the extent of its wealth, its population,its commerce, and the state of confidence or creditexisting amongst its inhabitants. A rich nation, coste-ris paribus, will require more gold and silver thana poor one a large population more than a smallone a nation carrying on much trade more than one\Y,hich carries on little and a nation where confi-dence and credit are circumscribed, more than one inwhich they are expanded. The first three of thesepropositions are self-evident. The fourth needs per-haps some illustration, and as I wish to leave nothingin dispute as I go along, I will state more plainlywhat is meant by it, which is, that in a country whereno credits or comparatively few are given on the saleof property or merchandise, and where consequentlypayments are made entirely or chiefly in coin on thedelivery of the articles sold, a larger amount of goldand silver is required, than in another country of equal


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6 A TREATISE ONwealth, population and trade, in which sales are usu-ally or frequently made on credit.What proportion the supply of the precious metalswhich each country secures to itself as a circulatingmedium bears to its wealth, its population, its trade,or, to the existing state of confidence or credit, itwould not be easy to ascertain: nor is it indeed neces-sary that it should be ascertained, as far as any prac-tical good can result from the knowledge. Thosewho carry on the operations of trade will take carethat a country has neither too much nor too little ofthem, and it may be assumed as a safe position, thatwhen the precious metals neither flow out from acountry in which there are no gold or silver mines,nor flow into it faster than is incident to her additionalshare of the new annual production of the mines, shehas her exact proportion. These proportions, whenonce attained as nearly as the nature of circumstanceswill permit, establish what may be called the gene-ral level of currencies, and it is to this level, as to aspecies of standard, that reference is made, when wesay that money like water will find its level. It istrue, that owing to the constant production of themines, which may at times occasion unequal distri-butions, or. distributions other than through the ac-customed channels, as was the case after the revolu-tions in Spanish America took place, which caused tobe sent first to the United States or England, themetals which formerly all went to Spain, as well asto a great variety of other circumstances which dis-turb the currency of particular countries, this levelmay never be a perfect one. It is sufficiently so, how-ever, for all purposes of reasoning upon it, and per-haps as much so as fully warrants the figure by whicha fluid-like property is ascribed to the precious metals.The surface of the ocean is never free from undula-tion, and the daily operation of the tides is constantlyinterfering with its level, as well as with that of rivers.

like the causes which


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CURRENCY AND BANKING. 7influence the movement of the waters, operate upongold and silver, in driving them from one place to ano-ther, but it is easily to be seen, that were the extent ofwealth, population, commercial transactions, and con-fidence, in all countries to remain the same for a longperiod together, and were the new productions of themines to be distributed in due proportions, and theold stock in each country to be diminished by con-sumption in an equal ratio, gold and silver wouldassume such a uniformity of exchangeable value, asto arrive at a perfect state of quiescence. Indeed, asit is, gold and silver are of all commodities the leastlikely to be exported from any country, except fromthose in which they are produced, and where of con-sequence they form a portion of the produce of theland and labor of the people, as iron and lead do insome other countries; or, from those which, in addi-tion to their supply for the purpose of currency, havepossessed themselves of an amount specifically in-tended for exportation to countries having productsnot procurable by any other means than by purchasewith gold and silver. * We may therefore conclude,that a level does exist, created as will be seen here-after, by the imports and exports of commodities otherthan the precious metals themselves, towards whichthe currencies of all countries have a perpetual ten-dency, and from which, if they do not precisely con-form to it, they do not greatly depart.

* From the period of the Independence of the United Statesup to about the year 1823, nearly all their imports from Chinaand India were paid for by an exportation of silver dollars,brought into the country in addition to the supply required forthe currency. Since the year mentioned, the chief part of theChina and India cargoes, are paid for by credits or bills onLondon, exports of manufactures, and by coin procured inEurope.


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A TREATISE ON

CHAPTER III.ON THE RELATIVE VALUE OF GOLD AND SILVER.GOLD and silver, like all other commodities, have

each their own peculiar value founded upon the im-mutable law of supply and demand, by which allvalues are determined. The scarcity of the one com-pared with that of the other, in connection with thedifference in their respective costs of production, thatis, of the expenses of mining and smelting the ore, andof refining the metal, establish between them a verywide difference as regards their relative value. Anounce of pure gold has always been, and probablyalways will be, worth more than an ounce of puresilver. But the ratio of this difference, it must bemanifest, is not fixed by any law of nature, any morethan the ratio between any two other commodities.Nature does not say, that an ounce of gold shall al-ways be worth so many ounces of silver, any morethan she says that a pound of copper shall always beworth so many pounds of iron, or a pound of cottonso many pounds of flour, and hence it is clear, thatthere is no law of nature applicable to gold and silver,which is not equally applicable to all other commodi-ties.What nature, however, has left undone, man in hislimited wisdom has attempted to accomplish, by theenactment of laws fixing the ratio at which gold andsilver shall be exchangeable for each other. Theselaws, when first enacted, were no doubt founded uponthe observation of the fact, that in the general marketof the commercial world, these two metals had, forlong periods together, preserved something like a fixedproportion, and it was no doubt conceived, that chain-ing them together by statute, would prevent themfrom ever separating.


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CURRENCY AND BANKING. 9We learn from Adam Smith,* that prior to the dis-

covery of the American mines, which first began toshow its effects somewhere about the year 1570, inthe diminished value of both the precious metals bythe new and annually augmenting supplies whichwere derived fro.n that fruitful source, the value ofpure gold to pure silver was established in the diffe-rent mints of Europe, at proportions varying fromone to ten, to one to twelve; that is, one ounce of puregold, was declared to be the equivalent of ten to twelveounces of pure silver; and in their respective coinagesthese proportions were consequently observed. Atabout the middle of the 17th century, that is, aboutthe year 1650, the ratio between gold and silver cameto be regulated in the proportion of one to fourteen,and one tp fifteen ounces of silver, no doubt occasionedby the fact, that although both metals had becomemore abundant in proportion to the demand, and hadboth been depreciated below their former value, yetsilver had depreciated more than gold, to an extentthat had created new proportions in the general mar-ket, which it was the design of the new laws to followup.From the period last mentioned, there does not ap-pear to have been any material change in the relativevalue of gold and silver in the general market of thetrading world prior to the beginning of the presentcentury, when a further depreciation of silver in refe-rence to gold began to show itself, so that by the year1S20, an ounce of gold came to be worth near sixteenounces of silver, of which the consequence was, thatall the gold coins of the United States, where the mintproportion had been fixed at one to fifteen, were ex-ported from the country, to be exchanged for theirproper equivalent.!

* Wealth of Nations, Book I. Chap. xi.f In corroboration of this fact, the following statement of the


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10 A TREATISE ONThe author believes that he was one of the first, if

not the first, writer in this country who called the at-tention of the public to this new change, and appre-hensive at the time, that the legislative folly of attempt-ing to establish by law what nature herself could notestablish, would be repeated by a new enactment, heurged in December, 1821, upon the late Mr. Lowndes,a representative in congress from South Carolina, andchairman of the committee of finance, the expediencyof abolishing the coinage of eagles and their fractionalparts, and of substituting in their place new pieces, toweigh respectively an ounce, a half ounce, and a quar-ter of an ounce of standard gold, under the full convic-tion that they would soon be introduced into circula-tion at their proper equivalent, without involving usin the absurdity of having two legal tenders.* Thearguments presented to Mr. Lowndes in conversationwere at his particular request reduced to writing, to-gether wiiii answers to two points raised by him, andwere published in the National Gazette of 26th Janu-ary, 1822. A copy of this paper will be found in theAppendix, marked A.The death, in the course of the last mentioned year,coinage of Gold by the mint of the United States, at, and aboutthe period referred to, is adduced.

1818,1819,1820,1821,1822,1823,1824,

$242,940,258,615,

1,319,030,189,325,88,980,72,425,93,200.

This diminution in the coinage of gold after 1820 arose fromthe circumstance that nobody wished to import gold into thecountry to have it coined into eagles at ten dollars each, whenthe gold contained in an eagle was worth more than ten dollars.,* The ducat of Holland is current all over the continent ofEurope at its fair equivalent. Gold in France circulates at themarket rate of premium, silver being the ordinary currency.


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CURRENCY AND BANKING. 11of Mr. Lowndes, who was one of the few individualsin congress who had studied the subject of the coinage,appeared to suspend the ^action of that body in regardto the alteration of the mint regulations, and althoughseveral propositions were at different periods subse-quently submitted, yet nothing was done until the28th of June, 1834, when the law usually known asthe gold bill was passed. A short history of thesepropositions was drawn up by the author in the lastnamed year, and as it may be of service to those whohave a desire to study the subject, extracts therefromhave been placed in the Appendix marked B.In connection with this subject, it may not be amissto remark, that the proportion of one to fifteen or six-teen in the relative value of gold to silver, does not byany means warrant the inference that there is just fif-teen or sixteen times as much silver as gold in exis-tence. Adam Smith advances conclusive argumentsto show that the quantity of silver at the time he wrotewas far greater than the proportion which it bore togold called for, and indeed any one may be convincedof this fact if he will reflect upon the very small valueof gold compared with silver, that is consumed in plateand ornaments. The relative value of no two com-modities determines their relative quantities, and it iseasy to be perceived, that if a barrel of flour wereworth ten dollars, and a box of Spanish segars twentydollars, it would not necessarily follow that there werein existence only twice as many barrels of flour asthere were boxes of segars.


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12 A TREATISE ON

CHAPTER IV.OF THE BALANCE OF TRADE, OR OF THE CAUSES WHICHOCCASION THE TRANSMISSION OF THE PRECIOUSMETALS FROM ONE COUNTRY TO ANOTHER.

IN a preceding chapter, it was stated that the pre-cious rnetals are distributed by the operations of com-merce throughout the trading world, in such a wayas to establish what is called a general level of cur-rencies. I shall now proceed to show the mode bywhich this distribution is accomplished, which is ac-cording to the laws of what is termed the balance oftrade.

It must be manifest to every observant mind, thateven under the most perfect level which the curren-cies of all commercial nations can attain, that is, undersuch a state of things as may be imagined where nomotive of profit could lead to the importation or ex-portation of the precious metals, except as relates tothe annual production of the mines, the prices of othercommodities will not be in all countries the same.Were this the case there could be no commerce, forthe only object of commerce is to transport commodi-ties from countries where they can be purchased fora comparatively small quantity of gold and silver; thatis, at a comparatively low price; to other countrieswhere they can be sold for a greater quantity of goldand silver; that is, at a higher price.* Any one can*The reader will be pleased to keep in mind, that price in

political economy is the value of a thing expressed in moneyonly, and therefore differs from the term va/ue, which expressesthe worth of things as compared with other things than gold andsilver. Thus we would say that five dollars is the price of ahat, where money is to he paid for it, but we would say thatfive pairs of shoes are the value of a hat, if the hat is to be paidfor in that many shoes.


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CURRENCY AND BANKING. 13perceive that iron would not be imported into theUnited States from England unless it could be soldhere at a higher price than it cost at the place of pro-duction, and that cotton would not be exported from theUnited States to Europe unless it could be sold thereat a higher price than it could be purchased for here,fFhe prices of different articles, it is self-evident, inevery country, are regulated by causes peculiar tothemselves, such as the soil, climate, wages of labor,degree of skill required, extent of population, capital,and taxation^ and this it is which sets in motion thewhole machinery of commerce. Even in the case ofbarter with savage nations, although gold and silverbe absent, yet the trader has reference in his calcula-tions to the metallic standard, in order to enable himto determine how much he can afford to give of whathe has to dispose of, in exchange for the commoditieswhich he is to receive in payment.The foreign commerce of a nation is usually of twokinds. The first is that wherein the export and im-port trade are carried on by the same individual, inthe same vessel, and in the prosecution of the samevoyage. Such is the trade of the United States withmost parts of the West Indies, South America, Africa,some parts of India, and some other countries. Theimports from those regions consist of the articles pur-chased with the proceeds of the outward cargoes, andthis trade is strictly an exchange of equal values, andalthough it may exhibit what is called a balance oftrade on one side or the other, yet it calls for no pay-ment. The same is true of the whale and other fish-eries, wherein although the amount imported may farexceed in value the amount exported, yet no balanceof trade is left to be paid, the difference being madeup by the value of the labor expended by the crew,of the freight earned by the ship, and by the profits ofthe enterprise.The second trade is that wherein the exports andimports are made by different classes of merchants,2


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14 A TREATISP; ONwithout any previous consultation or agreement withone another. Such is our trade with Great Britainand most of the other maritime nations of Europe.The exporters of cotton, rice, tobacco, flour, and theother commodities which form the bulk of our exportsto Europe, are very rarely the same individuals whoimport the dry goods, hardware, and the infinite vari-ety of other manufactures and productions which con-stitute the bulk of our imports from Europe. Theformer ship their cargoes to foreign countries, withoutany knowledge of the quantity or value of the com-modities which the importing merchants intend to or-der from abroad, and the latter send their ordersabroad for goods without any knowledge of the amountfor which the exported cargoes will be sold. Theformer class, that is, the exporters, get paid for theircargoes by drawing bills of exchange upon the pro-ceeds in the hands of their foreign correspondents;and the latter class, or the importers, pay for theirgoods by purchasing arid remitting these same bills.Under a course of operations carried on by so manyindependent traders, it would indeed be miraculous ifthe exports and imports should be so exactly equal asto leave no balance one way or the other. In truth,experience shows that the exports will sometimes ex-ceed the imports, and that sometimes the imports willexceed the exports, leaving a balance of trade in theformer case in favor of the country, and in the lattercase against it.Let us now suppose, that in a given country wherethe currency is at its proper level, where no gold orsilver flows out or flows in, and where consequentlyexchange would be at par, an excess of imports shouldtake place. What would be the first effect? Theanswer must be, a demand for more bills of exchangethan are for sale in the market, the effect of which is arise in the rate of exchange above par, which obvi-ously holds out an inducement for the exportation ofcommodities for which a sufficient inducement did not


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CURRENCY AND BANKING. 15previously exist. A rise in the exchange of one ortwo per cent, may sometimes determine shipments,which without such rise would not have been thoughtof; not that so small a profit would of itself induceshipments, but because one or two per cent, added tothe profit which might have been made without suchaddition, would elevate the gain to the height of theaverage mercantile rate of profit requisite to warranta shipment. A profit in advance is a powerful stim-ulus to exportation, especially where two thirds orthree fourths of the capital employed in the purchase ofthe exported commodities can be immediately replacedby the sale of a bill of exchange. The additional de-mand, therefore for bills, to assist towards paying thebalance is met, we will suppose, at once by additionalexports, it sometimes even happening that the remit-ting merchant, to save, as it is called, the premium onbills, becomes himself an exporter.Thus far it is manifest that the balance of tradeoccasions no exportation of the precious metals, andthat consequently the general level ef currencies isnot disturbed. But it may happen that the increaseddemand for exportable commodities arising from theaugmented premium on exchange, may raise theirprice to an extent equal to the rise in the price of bills,and thus put an end to their exportation, by takingaway the additional profit. A new expedient is thenresorted to by capitalists to take advantage of the pre-mium on exchange, which is to obtain a credit abroadupon which they may draw bills, under the calcula-tion that at some future, not very distant period, theywill be able to replace the funds at a lower rate ofexchange, and thereby realise a profit by the opera-tion. The transmission, too, of public securities, bank,railroad, and canal stocks, and the extension of cre-dits by the consent of the foreign creditors upon allow-ing interest for the extended term, are all well knownlevers in the mechanism of trade, (to say nothing ofbankruptcy), by which the tendency of an unfavora-


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16 A TREATISE ONble balance of trade to cause an exportation of theprecious metals is frequently neutralised. But it mayhappen, however, that all these measures combinedwill not keep down the price of bills of exchange tothe rate which will render them more advantageousto remit than gold or silver. That an exportation ofthe precious rnetals will then commence is quite appa-rent, but compared with the whole balance that may bedue, it will be exceedingly trivial, as 1 will proceedto show.We will suppose ten millions of dollars to be thecirculating medium of the supposed debtor country,and that that is the amount which is requisite to cir-culate her commodities and to maintain her currencyat an equivalency with the currencies of other coun-tries. No sooner does this quantity become dimi-nished by the exportation of any part of it, than ascarcity of money begins to be felt. A scarcity ofmoney invariably occasions a fall in the prices of com-modities, as every body knows, and that fall operates?.s an incentive to exportation, inasmuch as domesticproducts, which were before too high to export, willnow afford a profit. A fall in the price of cotton ofone cent a pound has sometimes occasioned the expor-tation of immense quantities in a short period; and it isvery clear that there is a price at which almost anyarticle might be exported to advantage, and that agradual diminution of the currency, if continued longenough, will eventually establish that price. It is idleto say that possibly the debtor country may not haveon hand a sufficiency of products to discharge thedebt, and that therefore she must be drained of herprecious metals to the last dollar. This can never be.If her wealth or her powers of production had notbeen commensurate to her demand for foreign com-modities, she could not have had sufficient credit torun deeply into debt. At all events, she would haveon hand a large portion of the foreign commoditiesin the purchase of which the debt was incurred, anda scarcity of money might even bring down prices so


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CURRENCY AND BANKING. 17low as to render the exportation of foreign commodities a profitable trade. It might even be an object tosend back to the place of production the very commo-dities, the importation of which created the unfavo-rable balance. * It is quite probale that a very smallreduction of the amount of coin would produce sucha fall in the prices of commodities as would lead totheir exportation to an extent adequate to keep downthe price of bills so as to prevent any further expor-tation of. the precious metals; but if this should not bethe case, and if the scarcity of money should continueto increase, those who had remittances to make wouldeither become bankrupt and make no remittances atall, or become so embarrassed as to default in theirpunctuality, either of which events would diminishthe demand for funds abroad, and stop pro tanto theexportation of gold and silver, t And here it may beremarked by the way, that a real scarcity of moneyis always accompanied by an artificial scarcity whichaggravates the effects of the former. If, for instance,a million of dollars in coin be exported, so as to pro-duce an outcry about scarcity of money, timid peopleand speculators will withhold another million fromcirculation; the former because they are afraid to lendit, and the latter because they expect to profit by for-cing down the prices of property and commodities toa still lower point, the effect of which would be todiminish the demand for the exportation of coin byreducing the prices of commodities.But independent of the tendency of the causes above* British goods have frequently been sent back from the Uni-ted States to England, as affording the best market for them,and it is a very common thing for vessels to bring back fromthe West Indies part of their outward cargoes, owing to their

being worth more at home than they could be sold for abroad.fAll the propositions here laid down, have recently beenfully established as practical truths in the United States, andespecially at New York even to the reshipping of British goodsto England.


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CURRENCY AND BANKING. 19llbrium would be restored, and the double currentarrested.

It may here be remarked, that the accounts currentbetween nations in their commercial dealings, that is,between the individual merchants of one country andthose of another, which is the only sense in whichwe speak ofcommercial transactions between nations,are not periodically settled like the accounts betweenindividuals of the same country, which are generallysettled by the actual payment of the balance. Na-tional accounts current are never settled. The balancemay be one way to-day and another way to-morrow,and as there is no general pay day, like the first ofJanuary, upon which a general balance is struck,facilities are afforded for warding off such a pressureon the bill market as would exist if a periodicalpunctuality were rigidly enforced.Having thus given a detail of the operations whichwould take place under an unfavorable balance oftrade, I will say a few words upon those which wouldoccur under a favorable balance. And in doing this,we will take for illustration the same country that wehave just been considering, and will suppose that anexcess of exports should take place. Of such a stateof things, what would be the first effect? The answermust be, a fall in the price of bills of exchange in themarket. More money would have to be drawn forthan the amount required to pay for the imports, andthe competition of the bill drawers might reduce therate of exchange down to the point at which it wouldbe more profitable for them to import gold and silverfrom abroad, than to draw bills. Still the quantitythat would be thus imported, would be comparativelylimited. The very existence of a foreign balance infavor of the country, would be proof of the abilityof the nation to consume an additional amount offoreign commodities, and the gain which could bemade by the importing merchants of one or two percent, on the exchange, by buying bills below par,in


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20 A TREATISE ONaddition to the usual profits, would invite to more ex-tensive importations. Additional importations wouldin fact take place, and the supply of these new com-modities would be met by a corresponding demand onthe part of those whose means of consumption fromextraordinary crops or extraordinary profits on theirbusiness, had thus become augmented.But a fall in the price of bills would have a ten-dency to discourage the exports of domestic products,and this discouragement, in its turn, would have theeffect of raising the price of bills by a diminution ofthe supply in the market, and thereby of removingthe motive for the importation of the precious metals.The importation of gold and silver, however, shouldit commence, would make money plentierthan before,and thus raise the prices of commodities, foreign aswell as domestic. This rise in price would encouragethe importation of foreign commodities, because theycould be sold at an increased profit, whilst it woulddiscourage the exportation of domestic products, bywhich means a part of the specie previously importedwould again be exported, in preference to the domes-tic products, which could only be procurable at anaugmented price. It thus appears, that a favorablebalance of trade, although it has a tendency to bringthe precious metals into a country, yet in point of factit does not effect it beyond a limited amount, resem-bling in this particular, the former case of an unfavo-rable balance; two streams might be flowing, one intothe country and one out of it, and sooner or later theequilibrium would be restored, and the level regained.Thus it would be impossible to retain in any coun-try any more than its true share of the aggregate massof the gold and silver of the trading world, or to ex-clude from it any portion of that share. No humancontrivance or legislation could possibly effect either,and hence all the efforts which have been made in allparts of the world to alter what the natural laws ofcommerce have decreed, by prohibiting the exporta-


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CURRENCY AND BANKING, 21tion of the precious metals under heavy penalties, orby attempting to encourage their importation by pro-tective or prohibitory duties on merchandise, or, byresorting to any other expedient, have proved utterlyfutile. Money, as has been said, like water, will findits level, and although the former like the latter, mayfor a period be forced into unnatural channels, the de-viation cannot long continue.And here, I will take occasion to remark, that informing an estimate of the comparative value of the

exports and imports of the United States, the customhouse returns, as they appear in their aggregates, arebut imperfect guides to determine the balance oftrade. The value of the exports given is their valueat the time and place of shipment, as furnished by theshippers under oath, in the form of manifests. Thevalue of the imports, is their cost abroad, as ascer-tained by the invoices, also furnished under oath,subject to such revision by the custom house apprai-sers as may, in case of suspected fraud in the valua-tion of goods chargeable with ad valorem duties, bedeemed right and just. These foreign invoices em-brace the cost of the articles, and what are called theshipping charges, that is, the charges without thepayment of which they could not be put on shipboard,but include no frieght, or insurance; and where theyare made out in Brazil, Buenos Ayres or other coun-tries, where a depreciated paper currency exists, dueallowance is made for the depreciation.Now, as cargoes shipped abroad from the UnitedStates, are burthened with the expenses of freight andinsurance, their value at foreign ports must generallybe augmented by the amount of these expenses andthe profits on the voyage, and consequently the nettproceeds of their sales must always furnish a fundadequate to the purchase of foreign commodities to agreater value than their cost at home. On this ac-count it necessarily follows, that where the trade of acountry is profitable, its imports will always exceed itsexports, and this too, just in the degree that it is profi-


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22 A TREATISE ONtable, and nothing is clearer than that if the voyageout and home does not give a greater amount of im-ports than of exports, the trade would be abandoned.Of this proposition there can be no dispute, and it isquite probable that an export of a hundred millions ofdollars would purchase abroad as many commoditiesas would show an import on the custom house booksof a hundred and twenty or more millions of dollars,thus overthrowing the theory of that class of reasonerswho maintain that the balance of trade is against acountry when it imports more than it exports, andwho consequently believe that a nation is growingpoor when she is in reality growing rich.But to make this matter perfectly plain, I will illus-trate it by a practical case that every body can under-stand.A merchant in Philadelphia purchases one thou-sand barrels of flour at eight dollars per barrel, andships it to the West Indies. The custom house booksin this case would show an export of eight thousanddollars. On the arrival of the cargo abroad it sellsfor twelve dollars per barrel, and after paying freight,duties, commissions, and all other charges, leaves thenett proceeds ten thousand dollars. This sum isinvested in coffee, and brought home, where it isentered upon the custom house books as an import ofthat amount. Here, then, we would have an exportof eight thousand dollars arid an import of ten thou-sand dollars, showing a clear gain of two thousanddollars, without leaving any balance due one way orthe other. A stronger illustration than this even, is tobe found in the operation of our whaling ships. Avessel with a cargo consisting of nothing but provi-sions sufficient to feed a crew for a voyage, and asmany staves, hoops, and headings, as will make casksenough to hold a cargo of oil, clears out at New Bed-ford for the South seas. The custom house booksshow an export of ten thousand dollars, perhaps, andwhen the ship returns with a cargo of oil, they giveus an import of fifty thousand dollars, thus showing


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CURRENCY AND BANKING. 23what the superficial reasoners above referred to wouldcall a balance of trade against the country of fortythousand dollars, but which is a clear evidence of again to the owners and crew, and consequently to thecountry.But even if the custom house books were to fur-nish accurate statements of the nett proceeds of thesales of the cargoes exported, as well as of the foreigncost of the homeward cargoes, they would not be suf-ficient to enable us to form a correct estimate of thereal balance of trade. Debits and credits are createdin the foreign trade of every country, which neverappear on the custom house books. Specie is im-ported and exported by emigrants and passengers intheir trunks, or secretly shipped by merchants to avoidpenalties or odium, or, exposure of their operations.Goods are smuggled, and others are purchased withfunds earned by vessels abroad, engaged in the carry-ing trade, and thereby augment the imports, whilstships are frequently sold abroad, and thereby aug-ment the exports. Large amounts of property arealso exported from some countries for which no pro-ceeds are to return, or at least, to return at an earlyday, such as happens in the case of foreign subsidies,the maintenance of troops arid navies abroad, thetransmission of revenues to non-resident capitalists,and funds for the expenses of travellers in foreigncountries. To these may be added losses at sea, or byfires abroad, the bankruptcy of the persons to whomthe exported commodities are sold, and investmentsin foreign loans and joint-stock companies. In mostof these cases property of some kind or other is sentabroad which appears on the custom house booksamongst the exports; and, although in many of themthe actual transmission for these specific objects maybe in the form of bills of exchange, yet it is manifest,that these bills could only be drawn upon shipmentsof property.In the foregoing remarks it has been laid down asan axiom, that the price of bills of exchange is deter-


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24 A TREATISE ONmined by the balance of trade. Strictly speaking,however, this is not always the case, for this balanceis liable to be modified by what is called the balanceof payments; and in truth this latter principle it iswhich regulates the daily rate of the exchanges. Ifall the merchandise exported and imported was to beimmediately paid for at the time of its changinghands, the balance of trade and the balance of pay-ments would be identical. But, in the intercoursebetween nations we know that this is not always thecase, and that circumstances occur to prevent theimmediate influence of the balance between importsand exports from acting directly upon the exchanges.Amongst these circumstances are the following:

1. Where the imported articles are bought on acredit, and are to be paid for at a distant time, whilstthe exported articles are sold for cash, or vice versa.

2. Where in the case of both imports and exportsthe sale is on credit, but the credits are not of thesame length.

3. WThere the articles shipped abroad from one ofthe countries should not meet with a ready sale, andshould be kept on hand for a length of time withoutbeing drawn upon, whilst on the other side a promptsale is made, and bills drawn for the proceeds.

In either of these cases, the operation of the balanceof payments on the exchanges might be such as notonly to neutralise

for a time the operation of thebalance of trade, but to turn the exchanges againstthe country which had the balance of trade in itsfavor. A case in point can readily be referred to.

If an account current were to be made out of thepast state of debits and credits between the UnitedStates and Great Britain, it would no doubt be found,that from the date of planting the first British colonyin this hemisphere, we have owed a balance of tradethat has never been discharged, and which at timesmay have amounted to a hundred millions of dollarsor more; and yet, owing to the credit that has beenextended to us, by which the pay-day has been de-


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CURRENCY AND BANKING. 25ferred,the exchange has not always been against us,buthas, on the contrary, been so controlled by the balanceof payments as frequently to have been in our favor.*

CHAPTER V.ON THE PRINCIPLES OF EXCHANGE.

BILLS of exchange are those commercial instru-ments by which a merchant in one country or placedirects money which is subject to his control inanother country or place to be paid over to a thirdparty. In the commercial transactions of every na-tion, some of the merchants become indebted to othermerchants in foreign countries for commodities pur-chased there upon credit, whilst some others havefunds in those foreign countries arising from the saleof cargoes disposed of there. If bills of exchange didnot exist, the debtor class of these merchants wouldbe obliged to incur the expense and risk of transport-ing coin or bullion to foreign countries in dischargeof their debts, and the creditor class would also beobliged to incur the same expense and risk in import-ing coin or bullion in payment of their cargoes soldabroad. By this double transmission, the merchants,and consequently the nations to which they belonged,would be losers to an amount equal to all the ex-penses and risks so incurred, together with intereston their capitals for the time they were out of theirreach. Nor could this be avoided unless the im-porters and exporters were always the same identicalindividuals, in which case the merchandise purchased

* For a table of Imports and Exports of the United Statesfrom 1789 to 1839, see Appendix F.3


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26 A TREATISE ONabroad would be paid for by the proceeds of themerchandise sold. By the operation, then, of billsof exchange, the necessity of this double transmissionis entirely avoided, and the funds abroad, instead ofbeing sent home, are transferred to those who havedebts to pay abroad, and who are thus exemptedfrom the expense and risk of sending coin or bullionin payment of their debts.But this benefit, in which the whole nation partici-pates, is not limited to the mere application of funds

in any given place to the payment of a debt due inthat place. It matters not whether the fund and debtboth stand on the books of merchants at the sameplace, or whether the debt be due at Manchester andthe fund be at Paris. The magic power of bills ofexchange transfers the payer and receiver both toLondon, the great seat and centre of British and in-deed of European commercial operations.But the merchants who make remittances of billsof exchange to foreign countries, to pay for merchan-dise purchased there, do not, it is manifest, procurethose bills of exchange for nothing. They must pur-chase them from those who have funds abroad todraw for, and in doing this they will endeavor toprocure them at as cheap a rate as they can. It is,on the other hand, the interest of those who have billsfor sale, to secure the highest price for them theycan, and it is this competition between buyer andseller that determines the ?narket price, which, likethe market price of commodities, must always dependupon the proportion which the supply bears to thedemand. If bills of exchange are scarce, their pricewill be high. If they are plenty, their price will below. There is, however, one peculiarity belongingto a bill of exchange, which is not common to anycommodity, and which ought always to be kept inmind in discussing this subject. It is, that if it can-not be sold at a price that will suit its owner, he hasit in his power to avoid the necessity of a sale atgreat loss by importing his funds in coin; and if it


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S3 A TREATISE ONbe a doubt, and whenever the market price of ex-change differs from these rates, it must have its causein one of the following circumstances.

If the exchange be above, it must either be that themerchants who have remittances to make are igno-rant of their business, and therefore pay more for abill than it is worth, or that small profits are notworth their attention, or that there is a penalty or adegree of odium attached to the exportation of coinwhich they are not prepared to encounter, or that thepunctuality which is expected of them by their cor-respondents abroad is of a character that would notjustify the hazard of a miscarriage by a single ship.

If the exchange be below, it must be because theowner of the funds abroad cannot afford to wait thetime requisite for the transmission of the coin, orbecause in the actual state of the money market,money is worth to him more than the ordinary inter-est, or because there exists a penalty or a degree ofodium attached to the exportation of coin in the coun-try from which his fund is to be drawn.

It must, however, be remarked, that it sometimeshappens that bills are sold below the limits here de-signated in the following cases, viz:

1. Where the commanders of ships of war on for-eign stations have occasion to draw bills upon theirgovernment, at ports of limited trade, or at which thecourse of trade does not call for such bills. I haveknown a bill on the navy department drawn at aport in South America to be sold at twelve per cent,below the true par.

2. Where masters of vessels and supercargoes, atsuch ports, have not merchandise enough to fill uptheir vessels, and on that account find it for their in-terest to sell bills at a great discount, for the purposeof buying bulky commodities to bring home, andthereby earn a freight more than equivalent to theloss sustained on the bills.

3. Where masters of vessels enter such ports in dis-


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CURRENCY AND BANKING. 29tress, and are obliged to draw bills upon their ownersfor necessary repairs.In wealthy countries, however, where bankers areprepared with large capitals devoted to speculations inbillsof exchange,great fluctuations from the par are notlikely to take place, inasmuch as bills can always bebought from or sold to them, by allowing a small profitbeyond the expenses of exporting or importing coin.The trade of a banker in Europe is to study the ex-changes not only between the place at which he residesand all other places, but also between all those placesand each other, by which means he is generally en-abled, by a combination of operations, by selling billson one place and by buying them on another, notonly to raise the fund with which he deals, but torealise a profit. Thus, for instance, if he reside atLondon, and can sell a bill on Hamburgh at half percent, premium, and buy one on Paris at half per cent,discount, arid with the latter buy one through hiscorrespondent at Paris on Hamburgh at par, he willhave realised one per cent, by the transaction, with-out the employment of any capital; the bill remittedfrom Paris to Hamburgh arriving in time to meet the .bill drawn upon his correspondent at the latter place.Having in the foregoing remarks spoken of the parof exchange, it is proper that the meaning of that termshould be explained.Exchange is an operation, which, strictly speaking,has relation only to the precious metals, and every

bill of exchange is in reality a mere order for the de-livery, on a certain day, of a given quantity of goldor silver. Exchange is at par or equality, when amerchant in one country can purchase with an ounceof pure gold, or an ounce of pure silver, a bill at sightupon a foreign country, which will there put him inpossession of an ounce of pure gold or an ounce ofpure silver, and the coins of full weight of the twocountries which are the respective equivalents of anounce of pure gold or an ounce of pure silver, will


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CURRENCY AND BANKING. 31cumstance, that at that period, the Spanish dollar, theonly coin of that denomination in circulation in theUnited States, was the well known equivalent in theBritish market, of four shillings and sixpence sterling,and very nearly such equivalent at the British mint.*By another act of congress of 2d April, 1792, esta-blishing the mint, and authorising a coinage for theUnited States, it was provided, that there should besilver dollars coined, " each to be of the value of aSpanish milled dollar," to contain 17dwt. 8 grains ofstandard silver; and that the proportion which the goldand silver coins should bear to each other, should bethat of 1 to 15, that is, that one ounce of pure gold shouldbe the equivalent of fifteen ounces of pure silver.tBut there is no natural proportion between goldand silver, as has been observed on a former occasion,any more than there is between lead and iron, and itis therefore very manifest that no law can permanentlyfix a par of exchange between them. When anychange in their relative value takes place in the mar-ket of the trading world, whether it be by an in-

* The mint price of silver at that period, as well as at thepresent, was 5s. 2c?. per ounce. The weight of the dollar was17dwt. 8 grains, but somewhat inferior in quality to the Britishstandard, so that if sent to the mint, it would have producedabout 4s. 5Jc?. As an exportable foreign coin, it was probablyworth in the market an additional ^e?., there being at that time aprohibition against the exportation of British coins.

f The adoption of this proportion was probably the result ofa sort of average, founded upon the comparison of the mintproportions of several different countries. What they were atthat precise date, I cannot say, but, by some tables that I haveseen, it appears that the mint proportions in 1810, at the placesnamed, were as follows, and probably had been so for a longperiod.

Paris,Cadiz,Lisbon,Naples,Genoa,

to 15.65-129. Venice,to 16. London,to 15.7-10. Bengal,to 14.5-10. Madras,to 14.53-100. Bombay,

to 14 88-100.to 15 13-62to 14 861.to 13 872.to 15.to 14 296.Leghorn, 1 to 14.53-100. China,Amsterdam, no regulation: market rate, about 1 to 14 7-10.


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32 A TREATISE ONcreased or diminished supply, of one or the othermetal, or, by an increased or diminished demand forone or the other, the par becomes changed. Thisevent did in reality take place, and in process of time,an ounce of gold, as has been already stated, becamegradually worth more than fifteen ounces of silver,and finally reached the proportion of one to sixteen.With this gradual change in the relative value ofgold and silver, the silver dollar ceased to be theequivalent of four shillings and sixpence sterling, andconsequently the pound sterling became the equiva-lent of more than four dollars and fourty-four hun-dredth parts of a dollar, for the simple reason, thatany person who possessed the quantity of gold repre-sented by the pound sterling before the coinage ofthe sovereign, and now actually contained in that coin,could obtain for it more than four dollars and forty-fourhundredth parts of a dollar in silver. But the mercan-tile usage did not conform to this change. The mer-chants adhered to the old par, as if a pound sterling wasthe equivalent of four dollars and forty-four cents bysome unchangeable law of nature, and for manyyears continued to ascribe the nominal premium onsterling bills of exchange, which was the mere expo-nent of this change in the relative value of gold andsilver, to the influence of the balance of trade. Thedelusion was partly removed by the act of congressof 14th July, 1832, which raised the value of thepound sterling for the calculation of ad valoremduties at the custom house to $4.80, and by two sub-sequent acts, one of 28th June, 1834, by which theBritish sovereign was made the equivalent in Ameri-can gold coins of $4. S7.075+ , and one of 18th Janu-ary, 1837, by which it was made the equivalent of{54.86. 65+, which is now the true par on London,corresponding within a very small fraction to 9 percent, premium on the old computed par.* I say

* The sign + at the end of the figures in this sentence, andwherever it occurs, denotes that there is a fraction still remaining.


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CURRENCY AND BANKING. 33"partly removed," because, strange as it may appear,there are thousands of persons at this very day, whohave no other belief on this subject, than that thenominal premium quoted on exchange, is a real ad-vance which takes so much money out of theirpockets. To remove, however, the vestiges of thisdeep rooted error, the Chamber of Commerce ofNew York, early in the year 1839, recommended tothe merchants of that city, to quote the exchange onEngland in dollars and cents for the pound sterling,instead of designating the per centage above orbelow par; a recommendation which was soon afterfollowed up by the Chambers of Commerce of Phila-delphia and other places, and will perhaps in time begenerally adopted.*

* Since the appearance of the first edition of this book, theauthor has been politely furnished, by Joseph Perry Esq., ofthe General Post Office at Washington, with a very detailedstatement of the value of the sovereign in American currencyunder the different acts of congress, ascertained by algebraicalcalculations, from which it appears, that the par of the poundsterling, wasBy the act of 2d April, 1792 $4.5657+ which was 2T\ percent above the computed par of $4.4444.By the act of 28th June, 1834, commonly called the goldbill $4.87075+ which was 9.591875+ or within a small frac-tion of 9| per cent, above the same computed par, andBy the act of 18th January, 1837, now in force $4.8665+which is 9.496+ or very nearly 9^ per cent, above the samecomputed par.The British mint price of standard gold is 3. 17s. 10|c?. peroz. and consequently the weight of the sovereign, the coin ofone pound sterling is 123.2744+ grains. The British standardof gold is, 22 carats fine, that is, 11 parts pure metal and 1 partalloy, and consequently the quantity of pure gold contained ina sovereign is 113.001 grains.The standard of gold in the United States by the existingact of 18th January, 1837, is 21.60 carats fine, that is 9 partspure metal and 1 part alloy, and the weight of the eagle, thecoin of ten dollars, is 258 grains standard, or 232.2 grains puregold.Now as the sovereign of full weight and standard puri-ty contains precisely as much pure gold as is contained in


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34 A TREATISE ON4.866563+ parts of an eagle, it follows that the true par of thepound sterling is $4.866563+ that is $4.86 and a fraction ofnearly f of a cent.But it appears by the Report of the Director of the Mint ofthe United States of March 19, 1839, that by the latest assaysmade by him of the British gold coins, their standard does notexceed 915i thousandths, whereas by the British mint regula-tions, it ought to be 916| thousandths, which is equal to 22carats. Taking this then as the true standard of the sovereign,it contains when of full weight only 112.8577 grains pure gold,and consequently the par of "the pound sterling thus found, isbut $4.860366, that is $4.86 and a very small fraction, equal to9.35+ or 9,7^ per cent above the old computed par.But this is not all. The act of congress of June 28, 1834, en-titled "An act regulating the value of certain foreign gold coinswithin the United States," declares that the sovereign when ofstandard purity, shall be a legal tender, at the rate of 94^ centsper pennyweight. By this act which has never been altered, asovereign of full weight and of the legal standard is worth inour gold currency the same as by the gold bill of 1834, abovereferred to, that is $4.87 and a, fraction, thus presenting theanomaly of foreign coins having a higher value attached tothem than their intrinsic worth in the coins of the country.

It so happens, however, that many of the sovereigns thatreach this country, have been somewhat worn, and on this ac-count, no doubt, in connection with the deficiency of purityabove referred to, they have been received and paid out by thebanks at $4.85.For the benefit of practical men, the following documents aresubmitted.PRESENT VALUE OF THE POUND STERLING IN DOLLARS ANDCENTS AT DIFFERENT RATES OF EXCHANGE ON THE COMPUTEDPAR OF $4.4444.

RATE.


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30 A TREATISE ONFROM TATE'S CAMBIST.

The par of exchange between London andParis, is 25 francs, 22 centimes per , stg, in gold." is 25 " 57 " " in silver.Amsterdam, is 12 guilders, 09 centimes " in gold." is 11 " 97 " " in silver.Hamburgh, is 13 m'cs banco, 10 schillings, "Bremen is 609i Rix dollars for 100 M stg. in gold.

CHAPTER VI.ON THE STEADINESS OF TRADE IN COUNTRIES

EMPLOYING A METALLIC CURRENCY.IP the principles laid down in the preceding chap-

ters be sound, as it is believed they are, it mustnecessarily follow that the operations of commerce incountries employing a metallic curency, are as regu-lar and as little liable to fluctuations as the nature ofthings will admit, and more than this can no wherebe looked for. That there will be occasional over-trading and over-speculation wherever there is credit,is too self-evident to require proof, and hence nocountry in which credit exists, can be entirely exemptfrom individual bankruptcies. Foreign wars, domes-tic disturbances, extensive conflagrations, storms andhurricanes, the failure of crops, the insolvency offoreign debtors, and a variety of other causes, mayproduce individual or even extensive commercialembarrassment. Too much credit may even leadincautious men into extravagance of expenditure,which may bring on their ruin, but in none of thesecases is the currency chargeable with the catastrophe.The mischief, whatever it may be, can only beascribed to the operations of credit; but as credit,when properly regulated, is far more influential in


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CURRENCY AND BANKING. 37producing good than evil, as will be shown hereafter,it is not to be annihilated on account of the misfor-tunes or imprudence of a comparatively few indi-viduals.

Such being the theory of this branch of my subject,I have the satisfaction to state in regard to the prac-tice under it, upon the testimony of a respectableAmerican merchant, who resided and carried on ex-tensive operations for near twenty years at Gibraltar,where there has never been any but a metallic cur-rency, that he never knew during that whole period,such a thing as a general pressure for money. Hehas known individuals fail from incautious specula-tions, or indiscreet advances, or expensive living; buthe never saw a time that money was not readily ob-tainable, at the ordinary rate of interest, by any mer-chant in good credit. He assured me, that no suchthing as a general rise or fall in the prices of commo-dities, or property was known there; and that sosatisfied were the inhabitants of the advantages theyenjoyed from a metallic currency, although attendedby the inconvenience of keeping in iron chests, andof counting large sums in Spanish dollars and doub-loons, that several attempts to establish a bank therewere put down by almost common consent.Upon this same subject, in reference to the city ofHavanna, more satisfactory evidence still, because inan official form, and more in detail, can be adduced.N. P. Trist, Esq., consul of the United States at thatport, in a letter addressed to the secretary of thetreasury under date of 19th October, 1838, and laidbefore the senate on the 21st of January following,annexed to a report from the committee of finance,communicated many valuable particulars in referenceto the practical working of a metallic currency.After describing the trade and importance of Cuba,Mr. Trist employs the following language:" These are tolerably sure evidences of a state ofactive industry and prosperous credit. Nor are they4


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CURRENCY AND BANKING. 39government of which is an absolute monarchy, main-tained by the bayonet." This is the country the inhabitants of which ac-tually have not the slightest knowledge of what amonetary convulsion means; where a general or anextensive stoppage of its commercial , movement,(using the words in their most comprehensive sense,embracing all branches of business,) not only hasnever spontaneously occurred, but has

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