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Banks and politics in american revolution Banks and Politics in America: from the Revolution to the Civil War
Bray Hammond
Princeton University Press, 1957
Chapter 1 only
Page 3
In 1694, in the reign of William and Mary, the English Parliament passed the Tunnage Act; in 1720, in the reign of George I, it passed the Bubble Act. The Tunnage Act provided funds for the current warfare with Louis XIV and authorized incorporation of the Bank of England to that end. It also provided the model for banking in the New World; for Alexander Hamilton, ninety-six years later, drew upon the Bank's example and charter in preparing legislation to the pattern of which American and Canadian banks still in varying degrees conform. The Bubble Act, whatever its original purpose, got its real and lasting force from the revulsion following collapse of speculation in South Sea Company stock. It also came in time to inspire opposition to banking in the New World; a President of the United States, Andrew Jackson, said more than a century later that ever since he read about the South Sea Bubble he had been afraid of banks.
The parliamentary acts of 1694 and 1720 are associated, therefore, with two traditions, which being transplanted to America were for more than a century in growing conflict. The act of 1694 is a monument to faith in the power and beneficence of credit; the act of 1720 is a monument to distrust of it. About 1832, credit triumphed, and since then the distrust of it has shown, only now and then, some feeble signs of life.
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When banking began in America, about 1780, the bulk of it in Great Britain and Europe was in the hands of individuals, families, and partnerships, where it had been for centuries. And it continued so. Incorporated banks, such as the Riksbank of Sweden, the Bank of Spain, and the Bank of England, were outstanding, special, and few. Banking developed very differently in America.
America was not, like Europe, an ancient and matured economy with accumulations of monetary capital accessible in numerous money markets. ... But for want of Europe's long accumulations, especially of cash and other liquid capital, they had to invent improvise, covenant, and pretend. If they were to form banks at all, they had to do it by "clubbing together" their scanty funds, as Robert Morris said, and gain all the adventitious credit they could from public association and corporate charter.
In Britain, by now, such procedure had been rendered unlawful by the privileges of the Bank of England and by the terms of the Bubble Act. Laws protecting the former forbade banking by other corporations by partnerships of more than six members "in that part of Great Britain called England," and the Bubble Act restrained if it did not prevent large scale banking elsewhere.
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It undoubtedly purposed not so much to protest His Majesty's subjects from monopoly as to protect monopoly itself as possessed by the companies already chartered and by the South Sea Company particularly.
In that latter respect it was a Tory rival of the Bank of England, which was Whig. At the same time that it flourished, John Law presided in Paris over the operations of his Mississippi Company. Speculation in the shares of both the South Sea and Mississippi Companies collapsed in London and Paris respectively a few weeks apart in the summer of 1720.
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Yet in 18th century America economic conservatism was possibly stronger even than in 18th century England, for the people were more largely agrarian. Benjamin Franklin conjectured after the Revolution that for one artisan or merchant in America there were at least a hundred farmers. The popular economic precepts were those of frugality and avoidance of debt. Dr. Franklin, himself a successful business man, recommended these virtues in his Way to Wealth. "He that goes a-borrowing goes a-sorrowing."
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"Those who labour in the earth," wrote Jefferson in his Notes on Virginia, "are the chosen people of God, if ever he had a chosen people, whose breasts he has made his peculiar deposit for substantial and genuine virtue." Benjamin Franklin also could describe the agrarian position as well as if he were a farmer. Nations, he said, could acquire wealth in three ways: by war, which was robbery; by commerce, which was generally cheating; and by agriculture. The last was "the only honest way."
Page 9-10
In the 18th century America "banks" were known in three different senses. First, the word was used of corporate institutions-- the Bank of England, for example--of which, however, there was none in America till 1782. Second it was used of an issue of bills of credit by a colonial government: Rhode Island, for example, might emit "a bank of £40,000." This use became obsolete before the century ended. Third, it was used of an association of private persons who issued their own bills of credit.
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In its absence, a domestic medium of exchange was required, and even more legal tender, for the law unrealistically assumed the existence of silver and gold, which accordingly had to be produced for settlement of taxes and contracts. But the medium of exchange was so exhausted, wrote John Colman, a Boston merchant, in 1720, "that in a little time we shall not have wherewith to buy our daily bread, much less to pay our debts or taxes"; people in the country were lucky, he said, for they were not dependent on the "ready penny." Trade was languishing because "there is not money to buy with." ... The development of the economy tended to make the problem worse, for development required imports, and the imports put specie more in demand than ever. It was this dearth of specie, the only legal tender, that in 1786 drove the Shays rebels in Massachusetts to demand a medium with which they could protect their farms from tax sales--though the dearth at the time coincided with no unusual surplus of imports.
In their efforts to meet the need of domestic medium of exchange, several colonies were very successful. One was Pennsylvania. Benjamin Franklin had advocated her paper money and Thomas Pownall, who had been governor of Massachusetts and South Carolina, praised it in his study of colonial administration.
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Governor Pownall distinguished Pennsylvania's success from the "outrageous abuses" in other colonies and "the great injury which the merchant and fair dealer" had suffered from them. A group of London merchants who were engaged in trade with America, and with Pennsylvania in particular, petitioned Parliament in March 1749 in favor of that colony's money, which they said, had been issued "in an advantageous manner" and interference with which "would lessen the trade and exports of this kingdom." Maryland, from the early part of the 18th century, issued an acceptable paper money, levied a tax for its redemption, and kept the unused funds invested in stock of the Bank of England. Success attended the issue of bills of credit in other colonies also, notable New York, New Jersey, Delaware, Nova Scotia, and French Canada.
Page14
It [theory of paper money crazed agrarians] conflicts with the fact that many of the colonies had a satisfactory experience with paper money. It ignored the fact that when the federal Constitution was being composed, paper money was condemned because of the experience with continental bills issued to finance the Revolution and not because of the colonial experience. It ignored the fact that Andrew Jackson and the agrarians of his day were fanatically opposed to paper money, whether issued by banks or by government.
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The colonial shortage of money was first felt by the colonial governments, next by the merchants, and least of all by farmers. The governments felt it because cash was needed for wars and administrative expenses. ... The first American issues of paper money were occasioned by the expedition from Massachusetts against the French, in 1690, and from then on issues and advocacy of issued never ceased.
Page 16
In 1767, in his Remarks and Facts Concerning American Paper Money, he avers that in the middle colonies the money has increased their "Settlements, Numbers, Buildings, Improvements, Agriculture, Shipping, and Commerce."
Dr. Douglass, an intelligent physician who appears to have had much more authority with historians and economists than Benjamin Franklin, can not mention paper money without heat. ... Paper money, he concedes, has given "some Men Opportunities of building vessels and running into trade," but they are men without substance, not "large traders," and he expects them to fail.
Page 17-18
Rhode Island was generally considered the most reprobate of the colonies. From 1715 to 1750, she issued eight "banks" of paper money, mostly lent to borrowers. The preamble to the act authorizing the first of these "banks," one of £40,000, recalled the expense of fighting the French and the Indians and other military charges that had "reduced the Money of the Colony and other Mediums of Exchange unto a very low Ebb that thereby Trade is sensibly Decayed, the Farmers thereby Discouraged, Husbandman and others Reduced to great Want and all sorts of Business Languishing, few having wherewith to pay their Arrears and many not wherewithal to sustain their daily wants by Reason the Silver and Gold in the first place necessary to defray the Incident and Occasional Charges hath been exhausted..."
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Some years later, in response to a request from the Lords Commissioners of Trade for Foreign Plantations, Governor Richard Ward made a report on the colony's currency, 9 January 1740. He too was a Newport merchant, Deputy Governor when John Wanton was made Governor, and his successor when he died. ... He reviews one by one the paper money issued I have mentioned and describes the fruits of money policy which later historians and economists have called ruinous.
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"These, may it please your Lordships, are matters of the utmost importance to us; for navigation is one main pillar on which this government is supported at present; and we never should have enjoyed this advantage had not the government emitted bills of credit to supply the merchants with a medium of exchange, always proportioned to the increase of their commerce. Without this, we should have been in a miserable condition, unable to defend ourselves against an enemy or to assist our neighbors in times of danger.
"In short, if this Colony be in any respect happy and flourishing, it is paper money and a right application of it that hath rendered us so. And that we are in a flourishing condition is evidence from our trade, which is greater in proportion to the dimensions of our government that of any Colony in His Majesty's American dominions.
"...Hereto, we beg leave to add, that within the space of about six or seven years, several of the merchants of Newport have contracted a correspondence in London, procured goods to be sent to them, and thereby so well supplied our shop-keepers that our dependence on Boston hath been in some measure taken off. In return for those goods, our merchants have remitted to their correspondents ships of our own buildings, logwood fetched from the Bay of Honduras in our own vessels, bills of exchange purchased of the planters in the West Indies, and other commodities, in such quantities that for these six years last past bills have continued to be equal to silver, at twenty-seven shillings per ounce."
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A committee of the General Assembly of Rhode Island, February 1749, explains that Rhode Island currency is depreciated "because the inhabitants of New England constantly consumer a much greater quality of British manufacturers than their exports are able to pay for." This "makes such a continual demand for gold, silver, and bills of exchange to make remittances with that the merchants to procure them are always bidding one upon another and thereby daily sink the value of paper bills with which they purchase them."
"And it is plain where the balance of trade is against any country, that such part of their medium of exchange hath a universal currency will leave them, and such part of their medium as is confined to that country will sink in its value in proportion as the balance against them is to their trade. For what hath been the case with Rhode Island bills hath also been common fate of all the paper bills issued by the other Colonies in New England; they have been all emitted at near equal value and have always passed at par one with another and consequently have equally sunk in their value. And this will always be the case with infant countries that do not raise so much as they consume: either to have no money or if they have it, it must be worse than that of their richer neighbors, to compel it to stay with them."
Page 23
Adam Smith, commenting on the redundancy of paper money in America, and in Scotland, said that "in both countries it is not the poverty but the enterprising and projecting spirit of the people" that occasioned it.
For all but a few, the conditions of living were primitive and severe but not miserable. They were far better than in Europe.
British policy with respect to the monetary schemes of the colonial Americans was at first indulgent but became at last arbitrarily negative, in the spirit of the Bubble Act.
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A generation later, Adam Smith wrote that "£100 sterling was occasionally considered as equivalent in some of the colonies to £130 and in others to so great a sum as £1,100..." These things parliament knew, for she was constantly being reminded of them by exasperated creditors and colonial administrators. But what could she do? It seemed impossible to solve the problem without abandoning basic commitments on commercial and colonial policy; nor on the other hand could any prohibition of paper money be effectual without interfering with the common law right to borrow. For paper money was essentially an evidence of debt. Such interference, by a commercial people, was unlikely.
In 1740 John Colman, the Boston merchant whom I have quoted, organized one of those associations called "banks," whose bills of credit, lent to members of the association on the security of real estate, were not redeemable in specie. Other merchants who mistrusted this "land bank" organized a rival association whose bills were to be redeemed after a period in silver. ... Meanwhile Governor Jonathan Belcher had interposed despotically against the land bank. He warned Parliament that "If some speedy stop be not put to these things, they will be more fatal consequences to the Plantations than the South Sea Bubble was, in the year 1720, to Great Britain." That was ridiculous, but Parliament listened. When she was told that John Colman's scheme "would here in Great Britain be an high offense and attended with heavy punishments and might easily be suppressed" as being within the Bubble Act but that "his Majesty's Attorney and Sollicitor-General...have reported their opinion that that act does not extend to America," she took pains to extend it there "by express words." They new act was passed early 1741.
Page 25
There was already vocal in the colonies a resentment at Parliament's growing disposition to rule British subjects without allowing them representation, and the act of 1741 caused an uproar.
Besides arousing bitter feelings, the act of 1741 failed to stop the Americas, especially in New England and particularly in Rhode Island. The Rhode Islanders, Parliament was told, authorized issued of paper money, borrowed it, purchased goods and other property, depreciated it with successive issued, used it when depreciated to repay their indebtedness, and realized egregious profits. So Parliament passed in 1751 "An Act to regulate and restrain Paper Bills of Credit Paper Bills of Credit in his Majesty's Colonies or Plantations of Rhode Island and Providence Plantations, Connecticut, the Massachusets Bay, and New Hampshire in America; and to prevent the same being Tenders in Payments of Money." It forbade that "any Paper Bills or Bills of Credit...be created or issued under any Pretence whatsoever" but permitted issued for current administrative needs or emergencies-- a distinction pretty hard to define and observe in practice.
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Thirteen years later, 1764, Parliament passed the more general "act to prevent Paper Bills of Credit, hereafter to be issued in any of his Majesty's Colonies or Plantation in America, from being declared to be a legal Tender in Payments of Money." It bore on all the colonies and not on New England alone but seems to have left them free to issue paper money, so long as it was not legal tender. Certainly they did issue it: Nova Scotia continued to do so till Confederation in 1867.
In 1773 in "an Act to explain and amend" the 1764 measure, Parliament confirmed and enlarged the freedom of the American colonies to issue paper money.
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The new sovereign state of Virginia observed a like distinction in October 1777 when she enacted a law derived from Parliament's statue of 1764 but more drastic.
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The bills of credit issued during the Revolution were wartime expedients that stood on a very different footing from the colonial bills that preceded them. One may condemn the colonial bills and yet excuse those of the Revolution on the ground that there was no practicable alternative to issuing them, except giving up the struggle. Alexander Hamilton called them "indispensable," though never again to be employed. Benjamin Franklin said they had worked as a gradual tax upon each person in whose hands they had lost value, and that with them the Americans had "supported the war during five years against one of the most powerful nations of Europe."
The individual states issued bills and so did the Continental Congress--the bills of the latter being called "continentals." They could not possibly be replaced by specie, and the amount of them could not be held down to normal needs for circulation. Instead the amount was determined by the needs of the war. But the more there were issued, the less they were worth. In the end their value sank to nothing, as the phrase, "not worth a continental," surveys to testify.
Page 34
He concluded that the banks, especially under the National Bank Act, had usurped the sovereign power to create money. He wanted it restored, so that he might get the funds he needed from the state, and not from private corporations.
This point was made by Mr Jefferson himself in 1813. "Bank paper must be suppressed, and the circulating medium must be restored to the nation, to whom it belongs."
Page 35
The agrarian dislike of banking under the Republic continued the agrarian dislike of paper money in colonial days, for the distinctive mark of banks was their circulating notes, and these notes were a variety of paper money. The dislike was aggravated by the recent experience with continental bills during the Revolution and by the fact that banks were corporations. It was a blend of acute understanding and of pardonable ignorance. When Thomas Jefferson explained in 1791 that the vaunted power of banks to expand the supply of money was not a virtue but an evil, he showed that he discerned the function of banks as well as Alexander Hamilton did.
Page 36
In 1799 President John Adams wrote that "the fluctuations of our circulating medium have committed greater depredations upon the property of honest men than all the French piracies," which were then afflicting American commerce. In 1811 he wrote: "Our whole banking system I ever abhorred, I continue to abhor, and shall die abhorring." And in 1819 he wrote again that "banks have done more injury to the religion, morality, tranquility, prosperity, and even wealth of the nation than they can have done or ever will do good."
In John Taylor's footsteps, William Gouge said in 1833 that banking was "the principal cause of social evil in the United States," the italics being his.
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The source of wealth was the earth, and the producers thereof were those who tilled it and mined it and fished in its waters. The wealth possessed by bankers and stock-jobbers must have been taken somehow from these toilers.
For governments always have been borrowers, and repeatedly their dependence upon banks has been critical, especially in wartime. Since it is the function of banks to create money, and since it is characteristic of wars to cost money, the evolution of banking in the United States has received from wars some of its most powerful impulses. ...the first American bank came into existence largely because of the desperate need of the Continental Congress for funds with which to main the Army.
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