University of Virginia Library

MONEY. [43]

(Observations written posterior to the circular Address of
Congress in Sept. 1779, and prior to their Act of March, 1780.) [44]

It has been taken for an axiom in all our reasonings on the
subject of finance, that supposing the quantity and demand
of things vendible in a country to remain the same, their
price will vary according to the variation in the quantity of
the circulating medium; in other words, that the value of
money will be regulated by its quantity. I shall submit to the
judgment of the public some considerations which determine
to reject the proposition as founded in error. Should they be
deemed not absolutely conclusive, they seem at least to show
that it is liable to too many exceptions and restrictions to be
taken for granted as a fundamental truth.

If the circulating medium be of universal value as specie,
a local increase or decrease of its quantity, will not, whilst a
communication subsists with other countries, produce a corresponding
rise or fall in its value. The reason is obvious.
When a redundancy of universal money prevails in any one
country, the holders of it know their interest too well to waste
it in extravagant prices, when it would be worth so much
more to them elsewhere. When a deficiency happens, those
who hold commodities, rather than part with them at an
undervalue in one country, would carry them to another.
The variation of prices, in these cases, cannot therefore exceed
the expence and insurance of transportation.

Suppose a country totally unconnected with Europe, or
with any other country, to possess specie in the same proportion
to circulating property that Europe does; prices there
would correspond with those in Europe. Suppose that so
much specie were thrown into circulation as to make the
quantity exceed the proportion of Europe tenfold, without
any change in commodities or in the demand for them; as
soon as such an augmentation had produced its effect, prices

would rise tenfold; or which is the same thing, money would
be depreciated tenfold. In this state of things, suppose
again, that a free and ready communication were opened between
this country and Europe, and that the inhabitants of
the former, were made sensible of the value of their money in
the latter; would not its value among themselves immediately
cease to be regulated by its quantity, and assimilate itself to
the foreign value?

Mr. Hume in his discourse on the balance of trade supposes,
"that if four fifths of all money in Britain were annihilated
in one night, and the nation reduced to the same condition,
in this particular, as in the reign of the Harrys and Edwards,
that the price of all labour and commodities would sink in
proportion, and everything be sold as cheap as in those ages:
That, again, if all the money in Britain were multiplied fivefold
in one night, a contrary effect would follow." This
very ingenious writer seems not to have considered that in the
reign of the Harrys and Edwards, the state of prices in the
circumjacent nations corresponded with that of Britain;
whereas in both of his suppositions, it would be no less than
four fifths different. Imagine that such a difference really
existed, and remark the consequence. Trade is at present
carried on between Britain and the rest of Europe at a profit
of 15 or 20 per cent. Were that profit raised to 400 per cent.
would not their home market, in case of such a fall of prices,
be so exhausted by exportation—and in case of such a rise of
prices, be so overstocked with foreign commodities, as immediately
to restore the general equilibrium. Now, to borrow
the language of the same author, "the same causes which
would redress the inequality were it to happen, must forever
prevent it, without violent external operation."

The situation of a country connected by commercial intercourse
with other countries, may be compared to a single
town or province whose intercourse with other towns and
provinces results from political connection. Will it be pretended
that if the national currency were to be accumulated

in a single town or province, so as to exceed its due proportion
five or tenfold, a correspondent depreciation would ensue,
and every thing be sold five or ten times as dear as in a neighboring
town or province?

If the circulating medium be a municipal one, as paper currency,
still its value does not depend on its quantity. It depends
on the credit of the state issuing it, and on the time of
its redemption; and is no otherwise affected by the quantity,
than as the quantity may be supposed to endanger or postpone
the redemption.

That it depends in part on the credit of the issuer, no one
will deny. If the credit of the issuer therefore be perfectly unsuspected,
the time of redemption alone will regulate its value.

To support what is here advanced, it is sufficient to appeal
to the nature of paper money. It consists of bills or notes
of obligation payable in specie to bearer, either on demand or
at a future day. Of the first kind is the paper currency of
Britain, and hence its equivalence to specie. Of the latter
kind is the paper currency of the United States, and hence its
inferiority to specie. But if its being redeemable, not on demand
but at a future day, be the cause of its inferiority, the
distance of that day, and not its quantity, ought to be the
measure of that inferiority.

It has been shown that the value of specie does not fluctuate
according to the local fluctuations in its quantity. Great
Britain, in which there is such an immensity of circulating
paper, shews that the value of paper depends as little on its
quantity as that of specie, when the paper represents specie
payable on demand. Let us suppose that the circulating
notes of Great Britain, instead of being payable on demand,
were to be redeemed at a future day, at the end of one year
for example, and that no interest was due on them. If the
same assurance prevailed that at the end of the year they
would be equivalent to specie, as now prevails that they are
every moment equivalent, would any other effect result from
such a change, except that the notes would suffer a depreciation

equal to one year's interest? They would in that case represent,
not the nominal sum expressed on the face of them,
but the sum remaining after a deduction of one year's interest.
But if when they represent the full nominal sum of
specie, their circulation contributes no more to depreciate
them, than the circulation of specie itself would do; does it
not follow, that if they represented a sum of specie less than
the nominal inscription, their circulation ought to depreciate
them no more than so much specie, if substituted, would depreciate
itself? We may extend the time from one, to five,
or to twenty years; but we shall find no other rule of depreciation
than the loss of intermediate interest.

What has been here supposed with respect to Great Britain
has actually taken place in the United States. Being engaged
in a necessary war without specie to defray the expence,
or to support paper emissions for that purpose redeemable
on demand, and being at the same time unable to borrow,
no resource was left, but to emit bills of credit to be redeemed
in future. The inferiority of these bills to specie was therefore
incident to the very nature of them. If they had been
exchangeable on demand for specie, they would have been
equivalent to it: as they were not exchangeable on demand
they were inferior to it. The degree of their inferiority must
consequently be estimated by the time of their becoming exchangeable
for specie, that is the time of their redemption.

To make it still more palpable that the value of currency
does not depend on its quantity, let us put the case, that
Congress had, during the first year of the war, emitted five
millions of dollars to be redeemed at the end of ten years:
that, during the second year of the war, they had emitted ten
millions more, but with due security that the whole fifteen
millions should be redeemed in five years; that during the
two succeeding years, they had augmented the emissions to
one hundred millions, but from the discovery of some extraordinary
sources of wealth, had been able to engage for the
redemption of the whole sum in one year. It is asked,

whether the depreciation, under these circumstances, would
have increased as the quantity of money increased—or
whether on the contrary, the money would not have risen in
value, at every accession to its quantity?

It has indeed happened, that a progressive depreciation of
our currency has accompanied its growing quantity; and to
this is probably owing in a great measure the prevalence of
the doctrine here opposed. When the fact however is explained,
it will be found to coincide perfectly with what has
been said. Every one must have taken notice that, in the
emissions of Congress, no precise time has been stipulated for
their redemption, nor any specific provision made for that
purpose. A general promise entitling bearer to so many
dollars of metal as the paper bills express, has been the only
basis of their credit. Every one therefore has been left to
his own conjectures as to the time the redemption would be
fulfilled; and as every addition made to the quantity in
circulation, would naturally be supposed to remove to a proportionally
greater distance the redemption of the whole
mass, it could not happen otherwise than that every additional
emission would be followed by a further depreciation.

In like manner has the effect of a distrust of public credit,
the other source of depreciation, been erroneously imputed
to the quantity of money. The circumstances under which
our early emissions were made, could not but strongly concur
with the futurity of their redemption, to debase their value.
The situation of the United States resembled that of an individual
engaged in an expensive undertaking, carried on, for
want of cash, with bonds and notes secured on an estate to
which his title was disputed; and who had besides, a combination
of enemies employing every artifice to disparage
that security. A train of sinister events, during the early
stages of the war likewise contributed to increase the distrust
of the public ability to fulfill their engagements. Before
the depreciation arising from this cause was removed
by success of our arms, and our alliance with France, it had

drawn so large a quantity into circulation, that the quantity
soon after begat a distrust of the public disposition to fulfill
their engagements; as well as new doubts, in timid minds,
concerning the issue of the contest. From that period, this
cause of depreciation has been incessantly operating. It has
first conduced to swell the amount of necessary emissions,
and from that very amount has derived new force and efficacy
to itself. Thus, a further discredit of our money has necessarily
followed the augmentation of its quantity; but every
one must perceive, that it has not been the effect of the
quantity, considered in itself, but considered as an omen of
public bankruptcy.[45]

Whether the money of a country, then, be gold and silver,
or paper currency, it appears that its value depends on the
general proportion of gold and silver, to the circulating property
throughout all countries having free communication. If

the latter, it depends on the credit of the state issuing it, and
the time at which it is to become equal to gold and silver.

Every circumstance which has been found to accelerate the
depreciation of our currency naturally resolves itself into
these general principles. The spirit of monopoly hath
affected it in no other way than by creating an artificial
scarcity of commodities wanted for public use, the consequence
of which has been an increase of their price, and of the
necessary emissions. Now it is this increase of emissions
which has been shewn to lengthen the supposed period of their
redemption, and to foster suspicions of public credit. Monopolies
destroy the natural relation between money and
commodities; but it is by raising the value of the latter, not
by debasing that of the former. Had our money been gold
or silver, the same prevalence of monopoly would have had
the same effect on prices and expenditures; but these would
not have had the same effect on the value of money.

The depreciation of our money has been charged on misconduct
in the purchasing departments; but this misconduct
must have operated in the same manner as the spirit of
monopoly. By unnecessarily raising the price of articles required
for the public use, it has swelled the amount of necessary
emissions, on which has depended the general opinion
concerning the time and the probability of their redemption.

The same remark may be applied to the deficiency of imported
commodities. The deficiency of these commodities
has raised the price of them; the rise of their price has increased
the emissions for purchasing them; and with the increase
of emissions, have increased the suspicions concerning
their redemption.

Those who consider the quantity of money as the criterion
of its value, compute the intrinsic depreciation of our currency
by dividing the whole mass by the supposed necessary
medium of circulation. Thus supposing the medium necessary
for the United States to be 30,000,000. dollars, and the
circulating emissions to be 200,000,000, the intrinsic difference
between paper and specie will be nearly as 7 for 1. If
its value depends on the time of its redemption, as hath been
above maintained, the real difference will be found to be considerably
less. Suppose the period necessary for its redemption
to be 18 years, as seems to be understood by Congress;
100 dollars of paper 18 years hence will be equal in value to
l00 dollars of specie; for at the end of that term, 100 dollars
of specie may be demanded for them. They must consequently
at this time be equal to as much specie as, with compound
interest, will amount, in that number of years, to 100
dollars. If the interest of the money be rated at 5 per cent.
this present sum of specie will be about 41½ dollars. Admit,
however the use of money to be worth 6 per cent. about 35
dollars will then amount in 18 years to 100. 35 dollars of
specie therefore is at this time equal to 100 of paper; that is,
the man who would exchange his specie for paper at this
discount; and lock it in his desk for 18 years, would get 6 per

cent. for his money. The proportion of 100 to 35 is less than
3 to 1. The intrinsic depreciation of our money therefore,
according to this rule of computation, is less than 3 to 1; instead
of 7 to 1, according to the rule espoused in the circular
address, or of 30 or 40 to 1, according to its currency in the
market.

I shall conclude with observing, that if the preceding principles
and reasoning be just, the plan on which our domestic
loans have been obtained, must have operated in a manner
directly contrary to what was intended. A loan office certificate
differs in nothing from a common bill of credit, except
in its higher denomination, and the interest allowed on it; and
the interest is allowed, merely as a compensation to the
lender, for exchanging a number of small bills, which being
easily transferable, are most convenient, for a single one so
large as not to be transferable in ordinary transactions. As
the certificates, however, do circulate in many of the more
considerable transactions, it may justly be questioned, even
on the supposition that the value of money depended on its
quantity, whether the advantage to the public from the exchange,
would justify the terms of it. But dismissing this
consideration, I ask whether such loans do in any shape,
lessen the public debt, and thereby render the discharge of it
less suspected or less remote? Do they give any new assurance
that a paper dollar will be one day equal to a silver dollar,
or do they shorten the distance of that day? Far from it:
The certificates continue a part of the public debt no less than
the bills of credit exchanged for them, and have an equal
claim to redemption within the general period; nay, are to be
paid off long before the expiration of that period, with bills
of credit, which will thus be returned into the general mass,
to be redeemed along with it. Were these bills, therefore,
not to be taken out of circulation at all, by means of the
certificates, not only the expence of offices for exchanging,
re-exchanging and annually paying the interest, would be
avoided; but the whole sum of interest would be saved,

which must make a formidable addition to the public emissions,
protract the period of their redemption, and proportionately
increase their depreciation. No expedient could perhaps
have been devised more preposterous and unlucky. In
order to relieve public credit sinking under the weight of an
enormous debt, we invent new expenditures. In order to
raise the value of our money, which depends on the time of
its redemption, we have recourse to a measure which removes
its redemption to a more distant day. Instead of paying off
the capital to the public creditors, we give them an enormous
interest to change the name of the bit of paper which expresses
the sum due to them; and think it a piece of dexterity
in finance, by emitting loan-office certificates, to elude
the necessity of emitting bills of credit.