Currency as Debt: A New Theory of Money
Back To Basics—The Nature of Money
Part 2 of 4
 

There were only three banks in the United States in 1790: The Bank of Massachusetts in Boston, the Bank of North America in Philadelphia, and the Bank of New York in New York City.[24] In 1791 Congress chartered the first United States Bank. “Its capital was $10,000,000, to be paid, one-fourth in cash, the rest in bonds of the United States. The charter was to run for twenty years. It issued no bills under $10.”[25] The states rapidly duplicated this action, chartering more than 100 banks by 1812.

Banking developed first in New England. In theory, banks were subject to inspection and bank notes were to be redeemable in specie, meaning gold or silver coin. “Notes under $5 were not allowed in Massachusetts until 1805, but after that smaller denominations were allowed, and finally notes were issued as low as 25 cents, and, by the law that paper drives out specie to the lowest denomination to which it is issued, there was no specie in the New England States. The stock of specie in bank[s] was insignificant, and was moved from bank to bank to meet the inspectors’ visits. The downfall came in 1809. One bank in Massachusetts had $40 in specie; another nothing. The system of subscribing to capital by notes was, as it appears, universal.”[26]
 

Professor Sumner reports that the “Farmers Exchange Bank of Gloucester, R.I., founded in 1804, was probably the worst case.”[27] It was capitalized at one million dollars but only a little over $19,000 was ever paid in. The bank directors promptly withdrew their contributions leaving only $3,081.11. A man identified only as Dexter then “bought out eleven of the directors for $1,300 each, paid out of the bank’s funds.” He also borrowed $760,265 from the bank. When the bank failed, “it had $86.46 in specie; bills out unknown,” but estimated at $580,000.

Congress, in 1811, refused to recharter the United States Bank. The states felt no such restraint. “By 1816 the number of state-chartered banks had increased to 246, and by 1820 it exceeded 300.” It seemed to one observer that “wherever there was a church, a tavern, and a blacksmith, one could usually find a bank as well.”[28]

Gordon S. Wood describes the situation in his Pulitzer Prize winning book, The Radicalism of the American Revolution. “These hundreds of banks now issued the paper money that the people had desired. Of course, the bank notes were not real money or specie but only promises to pay gold or silver. Yet, in increasing amounts these bank notes passed as money; indeed, some Americans even grasped the fact that these banks were creating money.”[29] (Note the confusion in this 1992 publication: Banks were creating money that was money but was not “real” money. Unfortunately, this level of subject matter comprehension is typical.)

Mr. Dallas, Secretary of the Treasury, writes in 1814 that “[t]he multiplication of State banks in the several States has so increased the quantity of paper currency that it would be difficult to calculate its amount, and still more difficult to ascertain its value…There exists at this time no adequate circulating medium common to the citizens of the United States.”[30]

“The evils of the financial situation led to the establishment, in 1816, of the Second Bank of the United States, with a capital of $35,000,000, notes not to be issued below $5.”[31] Congress expected this action to restore some semblance of order to the monetary system, but it was only partially successful and at great cost. Fundamental problems remained: “Looseness of management, the want of legal regulation, the absence of any authoritative and effective business traditions and maxims, with, in not a few cases, purposed swindling of the most outrageous character, committed always with entire impunity…”[32]

The general state of the monetary system and its adjunct institutions served to justify the severe language of the English economist, J. R. McCulloch, noting at the time that “[h]ad a committee of clever men been selected to devise means by which the public might be tempted to engage in all manner of absurd projects, and be most easily duped and swindled, we do not know that they could have hit upon anything half so likely to effect their object as the existing American banking system. It has no[t] one redeeming quality about it, but is, from beginning to end, a compound of quackery and imposture.”[33]
 

24 Francis A. Walker, Money (1886, Reprinted 1968 by Augustus M. Kelley, Publishers, New York, NY 10010), p. 491 
25 William G. Sumner, A History of American Currency (1873, Reprinted 1968 by Augustus M. Kelley, Publishers, New York, NY 10010), p. 59 
26 Ibid., p. 61 
27 Ibid., p. 62 
28 Gordon S. Wood, The Radicalism of the American Revolution (1992, Published by Alfred A. Knopf, Inc.; Distributed by Random House, Inc. New York, NY), p. 317 
29 Ibid., p. 317 
30 Walker, op. cit., p. 494 
31 Ibid., p. 495 
32 Ibid., p. 496 
33 Ibid., p. 500