Brad DeLong: Origins of American Finance

In expectation that all difficulties will be removed, and that you will ultimately act on terms you approve, I take the liberty to submit to you some ideas relative to the objects of your department. I pretend not to be an able financier; it is a part of administration which has been least in my way, and, of course, has least occupied my inquiries and reflections. Neither have I had leisure or materials to make accurate calculations. I have been obliged to depend on memory for important facts, for want of the authorities from which they are drawn. With all these disadvantages, my plan must necessarily be crude and defective; but if it may be a basis for something more perfect, or if it contains any hints that may be of use to you, the trouble I have taken myself, or may give you, will not be misapplied. At any rate, the confidence I have in your judgment assures me that you will receive with pleasure communications of this sort: if they contain anything useful, they will promote your views and the public benefit; if not, the only evil is the trouble of reading them; and the best informed will frequently derive lights, even from reveries of projectors and quacks. There is scarcely any plan so bad as not to have something good in it. I trust mine to your candor without further apology; you will at least do justice to my intention.

The first step towards determining what ought to be done in the finances of this country, is to estimate, in the best manner we can, its capacity for revenue; and the proportion between what it is able to afford, and what it stands in need of, for the expenses of its civil and military establishments. There occur to me two ways of doing this: 1st. By examining what proportion the revenues of other countries have borne to their stock of wealth, and applying the rule to ourselves, with proper allowance for the difference of circumstances. 2d. By comparing the result of this rule with the product of taxes in those States which have been the most in earnest in taxation. The reason for having recourse to the first method is, that our own experience of our faculties in this respect has not been sufficiently clear, or uniform, to admit of a certain conclusion: so that it will be more satisfactory to judge of them by a general principle, drawn by the example of other nations, compared with what we have effected ourselves, than to rely entirely upon the latter.

The nations with whose wealth and revenues we are best acquainted, are France, Great Britain, and the United Provinces. The real wealth of a nation, consisting in its labor and commodities, is to be estimated by the sign of that wealth?its circulating cash. There may be times when, from particular accidents, the quantity of this may exceed or fall short of a just representative; but it will turn again to a proper level, and in the general course of things, maintain itself in that state.

The circulation of France is almost wholly carried on in the precious metals; and its current cash is estimated at from fifteen to sixteen hundred millions of livres. The net revenue of the kingdom, the sum which actually passes into the public coffers, is somewhere between three hundred and sixty and four hundred millions, about one fourth of the whole of its currency. An estimate of the wealth of this nation is liable to less fallacy than of that of the other two, as it makes little use of paper credit, which may be artificially increased, and even supported, a long time beyond its natural bounds.

It is supposed that the gross sum extracted from the people by the collectors of the revenue may be one third more than that which goes into the treasury; but as their exactions are excessive, and fall too heavy on particular orders, who are by that means reduced to indigence and misery, it is to be inferred, that, with moderate and reasonable expenses of collection, the present revenue is as great as the kingdom can well afford, from its present quantity of wealth.

The circulating cash of Great Britain, in paper and specie, may be stated at about forty millions of pounds sterling. Mr. Hume supposes it to have been, at the time he wrote his Essay on the Balance of Trade, about thirty millions. Other writers have carried it to fifty, and it is probably in a medium that we shall find the truth. I do not include in this, the whole amount of bank-notes, exchequer bills, India bonds, etc., etc.; but only such part as is really employed in common circulation, and performs the offices of current cash. In ?75, by Dr. Price?s statement, the net revenue of Great Britain was ten millions?that is, about one fourth of its current cash, as in France.

I have never met with any calculation that might be depended upon, of the current cash of the Seven Provinces. Almost the whole of their coin, as well as large quantities of plate and bullion, are shut up in the Bank of Amsterdam. The real wealth of the bank is believed to be about fifteen millions sterling; though, upon the strength of this fund, it has a credit almost unlimited, that answers all the purposes of cash in trade. As the Dutch, by their prudent maxims, have commonly the rate of exchange throughout Europe in their favor, and a considerable balance of trade, the use of paper credit (which, in part, also depends upon the particular nature of their banks) has not the same tendency with them, as in England, to banish the precious metals. We may therefore suppose these to be here, as in France, the true sign of the wealth of the nation. If to the fifteen millions in bank, we add two millions of specie for the retail circulation and various transactions of business, we shall, I imagine, have nearly the true stock of wealth of the United Provinces. Their revenues amount to something more than four millions, and bear the same proportion to the stock from which they are drawn, as those of France and England. I confess, however, the data, in their case, are not sufficiently ascertained to permit us to rely equally on the result. From these three examples we may venture to deduce this general rule,?that the proportion of revenue which a nation is capable of affording, is about one fourth of its circulating cash, so far as this is a just representative of its labor and commodities.

This is only applicable to commercial countries, because, in those which are not so, the circulating cash is not an adequate sign. A great part of domestic commerce is carried on by barter; and the state must receive a part of its dues in the labor and commodities themselves. The proportion, however, of the revenues of such a state to the aggregate of its labor and commodities, ought to be the same as in the case of trading nations to their circulating cash; with this difference, that the difficulty of collection and transportation, the waste and embezzlement inseparable from this mode of revenue, would make the real advantage and ultimate gain to the state infinitely less than when the public dues are paid in cash.

When I say that one fourth part of its stock of wealth is the revenue which a nation is capable of affording to the government, I must be understood in a qualified, not in an absolute, sense. It would be presumptuous to fix a precise boundary to the ingenuity of financiers, or to the patience of the people; but this we may safely say, that taxation is already carried, in the nations we have been speaking of, to an extent which does not admit of a very considerable increase without a proportionable increase of industry. This suffices for a standard to us; and we may proceed to the application.

From a comparison of the several estimates I have seen, of the quantity of current cash in this country previous to the war (specie and paper), I have settled my opinion of the amount at thirty millions of dollars, of which about eight might have been in specie: one fourth of this, by analogy, was at that time the proper revenue of these States; that is, seven and a half millions of dollars.

As taxation, however, has, by slow gradations, been carried to an extreme in those countries which I have chosen as examples, that would not be, but in a course of time, practicable in this, where the people have been so little accustomed to taxes, it may be doubted whether it would be possible to raise the same proportion of revenue here. The object of the war, I imagine, would supply the want of habit, and reconcile the minds of the people to paying to the utmost of their abilities, provided the taxes were judiciously imposed, and the revenues wisely administered. Besides this, there is a circumstance in our favor, which puts it in the power of government to raise an equal proportion of revenue without burthening the lower classes of the people in the same degree as in Europe. This circumstance is the much greater equality of fortunes, by which means men, in this country, may be made to contribute to the public exigencies in a much juster proportion to their property; and this is in fact the case. In France the rich have gained so entire an ascendant, that there is a constant sacrifice of the ease and happiness of the people to their avarice and luxury: their burthens are in no proportion to those of the middle order, and still less to those of the poor. In England and Holland the case, though not altogether, is in a great measure the same. There are also men of very large moneyed capitals, which were either formerly exempt from taxes by being in the public funds; or, having no visible representative for taxation to operate upon, enjoy virtually the same advantages. But if, at the commencement of the war, the ability of these States for revenue may be rated at seven and a half millions of dollars, when the amount of its circulating cash was thirty millions, now that it is reduced more than one half in real value, to what revenue are they to be supposed equal at this time? I should judge about one fifth less, and not more.

The diminution of our circulating cash is principally artificial. It is true, our foreign commerce has declined by the war, but our domestic commerce has increased. I know of no good reason to believe, that the quantity of labor and commodities have been materially diminished. Our exports have lessened, but our internal consumption has augmented. The men employed in the army, and in the departments connected with it, consume and waste three times as much as the same number of men in civil life. A number of husbandmen have been taken from their ploughs into military service; but the progress of our natural population has, in part, supplied their place; and the demands of the war have increased individual industry. The great influx of money at first operated upon the avarice of the people, and, for a long time, served also as a stimulus to industry, which taxation has since kept up on the principle of necessity. Notwithstanding the demands and competitions of two armies for supplies, we see that corn, which is the staple of these Middle States, is cheaper than for some years before the war; a strong argument of plenty.

We may infer from all this, that we stand in need now of nearly the same quantity of medium for our circulation as before the war. The depreciation of the money below the standard is to be attributed to a want of confidence rather than to a decay of resources. We find the people, in some of the States, distressed to pay their taxes for want of money, with ample means otherwise; which is a proof, that our current cash is not a competent representative of the labor and commodities of the country. Another proof of the same nature is, that particular States which have found no small difficulty in collecting their pecuniary taxes, have been successful in raising contributions to a large amount in kind.

This country never having been a country of manufactures, the productions of the soil were, as they still are, the principal source of revenue. The inhabitants have abridged their wants of foreign articles, from the scarcity of them, and have, in part, supplied their place by home manufactures, which, being chiefly conducted by the women, take nothing from the labor appropriated to agriculture, while it enables the farmer to spare a larger portion of his income to the public.

Whatever diminution our means of revenue may have suffered, must be accounted for on the decay of foreign trade, and on the loss of territory. The imposts on trade in Great Britain amounted to about a fourth of its total revenue. The proportion must be less in America. But suppose it to be the same; suppose our external commerce to be reduced one half, which I believe is an ample allowance, then one eighth should be deducted from our revenue on this account; which would bring it down to six millions five hundred and sixty-two thousand five hundred dollars. Allow for the loss of Georgia and South Carolina one eighth of this sum; this would reduce the income of the remaining States to five millions seven hundred and forty-two thousand one hundred and eighty-eight and four eighths dollars. But as the allowance in both cases is large, the diminution I have already supposed, of one fifth of the whole, appears to be nearest the truth; which leaves these States with a net revenue of six millions of dollars.

We will now examine how far this rule agrees with experience, and with what has already been effected in these States. Massachusetts may serve as a criterion. This is one of the States where taxation has been carried furthest. Taxes were so heavy last year, that I am informed there were real marks of distress among some classes of the people. The Legislature, in their late address, tell us that they amounted to six hundred thousand pounds lawful; and they appear to have thought the pressure of them too great, by reducing them at a time when they are obliged to have recourse to a large loan to answer the exigencies of the current year.

The taxes they specify, which seem to belong to those of the present year, with the addition of the bounties for raising men, and the beef supply, may be estimated at near five hundred thousand pounds.

This State is in a different situation from any other. Its position has made it impossible for the enemy to intercept its trade; while that of all the others has been greatly injured or totally obstructed. It has become, in consequence, the mart of the States northward of Pennsylvania; and its commerce has enlarged itself much beyond its former limits. A great part of the money expended for the support of the war has been disbursed there. Congress, in their requisitions for money, have rated the quota of Massachusetts at1 of the whole; but I believe its ability, at this time, is in the proportion of one fifth. I found this estimation on an impartial comparison of the circumstances of the several States.

Admitting the proportion to be just, and taking the taxes of the present year as a standard, the gross amount of our collective revenues would be two millions five hundred thousand pounds lawful; or eight millions three hundred and thirty-three thousand three hundred and thirty-three and one third dollars. The expense of collection, in England, is about one ninth of the gross amount; and considering that our revenue is to be raised in eleven different governments, each having a complete set of collectors of its own, the expense of collection, with us, will in all probability be not much less than it is in England. Supposing it to be the same, and that the taxes were to prove as productive as their normal amount, our net revenue would then be seven millions four hundred and seven thousand four hundred and eight and one half dollars; which considerably exceeds what it ought to be by my first calculation.

But there are considerations which may induce us to make large deductions from this sum. When the Legislature tells us, that the taxes of last year amounted to six hundred thousand pounds, it also tells us that there was a part of them still to be levied; which, among other things, had occasioned them to postpone the next tax to a future session. Whatever is due on the last year may be considered, in effect, as an anticipation on the taxes of the present; for it takes off so much from the ability of the people to pay them. The chances are, that the additional impositions projected for the current year will not be raised in their full extent. Taxes are seldom or never so productive as their estimated value; and in a case like this, must be expected to be more than commonly deficient.

It is to be observed, also, that the last year was a year of peculiar exertion. There was a general expectation of some attempt, in conjunction with our allies, decisive of the war. This made the people strain their efforts beyond their natural abilities; and yet they did not comply with the demands of the Legislature.

The money for the bounties this year, which I have calculated at sixty thousand pounds,1 may, in like manner, be regarded as an extraordinary and special contribution, which the people may be willing to submit to, over and above what they could probably afford to pay, to get rid of the insupportable inconvenience of temporary enlistments.

Reasonable deductions on these accounts being made, will bring the two calculations to a pretty exact agreement, and make them confirm each other. But were not this the case, I should be inclined, in preference, to trust the first, as being founded on a basis better known and better ascertained by experience. I believe, however, we may safely conclude, from both, that between six and seven millions of dollars is the proper revenue of these States, after the dismemberment of South Carolina and Georgia.

Having formed an estimate of our ability for revenue, the next thing to be ascertained is the annual expense of our civil and military establishments. With tolerable economy, I should suppose two millions and a half of dollars would amply suffice for the first, including the particular administration of each State. For the second, judiciously managed, eight millions of dollars would be adequate, calculating for an army of twenty thousand men, which are as many as we shall stand in need of, or be able1 to raise. Eleven millions of dollars will be then the amount of the annual expenses of these States. I speak on a supposition that a system were embraced, well adapted to rescuing our affairs from the chaos in which they are now involved; and which, while it continues, must baffle all calculation.

The difference between our revenues and expenses, on the preceding scale, will be from four to four and a half millions of dollars; which deficiency must of course be supplied by credit, foreign or domestic, or both.

With regard to credit abroad, I think we have little chance of obtaining a sufficiency, nearly to answer our purpose. France, by all the reforms she can make in her interior economy, by all the means she can procure in loans and lotteries, in addition to her revenue, can do little more than satisfy her own wants. The death of the Empress Queen, and the notorious hostility of the Emperor, will add to the number of these. She will, in all probability, be obliged to pay greater attention to her army, which has been neglected, for several years past, to apply all the resources of the kingdom to the improvement of the navy. Though Russia and Prussia, by the last advices, seemed disposed to control the ill-humor of the Emperor, France will hardly think it prudent to leave herself in a defenceless condition, relying on the precarious friendship and momentary interests of other powers. The increase of her army will necessarily increase her expenses, as she cannot, in the present state of things, retrench any thing from the navy; and of course she will have less money to spare to allies. It has been observed, that France has hitherto imposed none of the additional taxes usual in time of war; by doing which, it is imagined she would have it in her power, not only to supply her own wants better, but to contribute largely to ours. To this it has been answered, with great appearance of reason, that the credit of the financier very much depends on his having such a resource in reserve, which, being considered as a means he may command, when necessary, to fulfil his engagements, disposes moneyed men to lend to him with the greater freedom and confidence. The breaking in upon that resource, therefore (it is said), would injure credit, and obstruct loans in a degree that could not be compensated by the direct value of the revenue it would furnish.

Upon the whole, however, from a variety of siftings and inquiries, I should be mistaken if France did not lend this country eight or ten millions of livres annually, during the war; provided its finances were once put upon a reasonable footing: but this is not above a third of our wants.

I find no reason to flatter ourselves that we have much to expect either from the ability or inclination of Spain. Her government is far from being so rich as is vulgarly imagined. The mines of South America, of late years, have been less liberal of their profits; and, for fear of accidents, but a small part of their product, since the war, has been imported into Europe. The extreme indolence of the Spaniards, and their neglect of agriculture, manufactures, and trade, make them tributary to their more industrious neighbors, who drain them of their precious metals as fast as they arrive.

But if they were heartily disposed to do it, they might still afford us some assistance. Their conduct hitherto has manifested no such disposition; it has been as cold and reserved as it could well be. The bills drawn upon them have not been rejected, but they have not been paid. Their permitting the residence of a British emissary among them, and the countenance they give him, unprecedented in a state of war, afford just room for a distrust of their intentions, though it may be nothing more than a stroke of policy, to play him off against our negotiators, and make us bid higher for their friendship. Their method of prosecuting the war is passive to a degree that can scarcely be resolved even into Spanish supineness, but seems to have a more corrupt original. A bigoted prince, governed by a greedy confessor, is a character on which little dependence can be placed.

?T is not on Spain, then, that we are to build our hopes of any considerable succors in money.

The Dutch Government has of long standing mortgaged all its revenues. Taxation has been carried to a length that admits of little extension. ?T is from its credit with its own citizens that it must derive the means of making war. It has every thing to do. Its fleet is to be in a manner created anew and its land forces to be recruited, having been for some time past suffered to decline very much. It will, therefore, stand in need of all its credit for its own uses. Of course, we have nothing to expect from the government of that country.

The individuals will not have confidence enough in our public councils to embark any considerable part of their fortunes with us on the ordinary principles of a loan. Stronger inducements, the prospect of commercial advantages, securities differing from the mere faith of the United States, must be held out to tempt them to engage far with us. The plan I am going to propose endeavors to conciliate these objects.

As to internal loans, on which, after all, we must chiefly depend, there are two things that operate against them to any large amount: the want of a sufficient number of men with sufficient moneyed capitals to lend the sums required, and the want of confidence in those who are able to lend to make them willing to part with their money. It may be added that they can employ it to greater advantage in traffic than by merely lending it on interest.

To surmount these obstacles, and give individuals ability and inclination to lend in any proportion to the wants of government, a plan must be devised which, by incorporating their means together and uniting them with those of the public, will, on the foundation of that incorporation and union, erect a mass of credit that will supply the defect of moneyed capital, and answer all the purposes of cash; a plan which will offer adventurers immediate advantages, analogous to those they receive by employing their money in trade, and eventually greater advantages; a plan which will give them the greatest security the nature of the case will admit for what they lend; and which will not only advance their own interest and secure the independence of their country, but, in its progress, have the most beneficial influence upon its future commerce, and be a source of national strength and wealth.

I mean the institution of a national bank. This I regard, in some shape or other, as an expedient essential to our safety and success; unless, by a happy turn of European affairs, the war should speedily terminate in a manner upon which it would be unwise to reckon. There is no other that can give to government that extensive and systematic credit which the defect of our revenues makes indispensably necessary to its operations.

The longer it is delayed the more difficult it becomes. Our affairs grow every day more relaxed and more involved; public credit hastens to a more irretrievable catastrophe; the means for executing the plan are exhausted in partial and temporary efforts. The loan now making in Massachusetts would have gone a great way in establishing the funds on which the bank must stand.

I am aware of all the objections that have been made to public banks; and that they are not without enlightened and respectable opponents. But all that has been said against them only tends to prove that, like all other good things, they are subject to abuse, and, when abused, become pernicious. The precious metals, by similar arguments, may be proven to be injurious. It is certain that the mines of South America have had great influence in banishing industry from Spain, and sinking it in real wealth and importance. Great power, commerce, and riches, or, in other words, great national prosperity, may, in like manner, be denominated evils; for they lead to insolence, an inordinate ambition, a vicious luxury, licentiousness of morals, and all those vices which corrupt government, enslave the people, and precipitate the ruin of a nation. But no wise statesman will reject the good from an apprehension of the ill. The truth is, in human affairs there is no good, pure and unmixed; every advantage has two sides; and wisdom consists in availing themselves of the good, and guarding as much as possible against the bad.

The tendency of a national bank is to increase public and private credit. The former gives power to the state, for the protection of its rights and interests: and the latter facilitates and extends the operations of commerce among individuals. Industry is increased, commodities are multiplied, agriculture and manufactures flourish: and herein consists the true wealth and prosperity of a state.

Most commercial nations have found it necessary to institute banks; and they have proved to be the happiest engines that ever were invented for advancing trade. Venice, Genoa, Hamburg, Holland, and England are examples of their utility. They owe their riches, commerce, and the figure they have made at different periods, in a great degree to this source. Great Britain is indebted for the immense efforts she has been able to make, in so many illustrious and successful wars, essentially to that vast fabric of credit raised on this foundation. ?T is by this alone she now menaces our independence.

She has, indeed, abused the advantage, and now stands on a precipice. Her example should both persuade and warn us. ?T is in republics where banks are most easily established and supported, and where they are least liable to abuse. Our situation will not expose us to frequent wars; and the public will have no temptation to overstrain its credit.

In my opinion, we ought not to hesitate, because we have no other resource. The long and expensive wars of King William had drained England of its specie; its commerce began to droop for want of a proper medium: its taxes were unproductive, and its revenues declined. The administration wisely had recourse to the institution of a bank; and it relieved the national difficulties. We are in the same, and still greater, want of a sufficient medium. We have little specie; the paper we have is of small value, and rapidly descending to less: we are immersed in a war for our existence as a nation, for our liberty and happiness as a people: we have no revenues and no credit. A bank, if practicable, is the only thing that can give us either the one or the other.

Besides these great and cardinal motives to such an institution, and the advantages we should enjoy from it, in common with other nations, our situation, relatively to Europe and to the West Indies, would give us some peculiar advantages.

Nothing is more common than for men to pass from the abuse of a good thing, to the disuse of it. Some persons, disgusted by the depreciation of the money, are chimerical enough to imagine it would be beneficial to abolish all paper credit, annihilate the whole of what is now in circulation, and depend altogether upon our specie, both for commerce and finance. This scheme is altogether visionary, and in the attempt would be fatal. We have not a competent stock of specie in this country, either to answer the purposes of circulation in trade, or to serve as a basis for revenue. The whole amount of what we have, I am persuaded, does not exceed six millions of dollars, one fifth of the circulating medium before the war. To suppose this would be sufficient for the operations of commerce, would be to suppose that our domestic and foreign commerce were both reduced four fifths: a supposition that carries absurdity on the face of it. It follows that if our paper money were destroyed, a great part of the transactions of traffic must be carried on by barter; a mode inconvenient, partial, confined, destructive both of commerce and industry. With the addition of the paper we now have, this evil exists in too great a degree.

With respect to revenue, could the whole of our specie be drawn into the public treasury annually, we have seen that it would be little more than one half of our annual expense. But this would be impracticable; it has never been effected in any country. Where the numerary of a country is a sufficient representative, there is only a certain proportion of it that can be drawn out of daily circulation; because, without the necessary quantity of cash, a stagnation of business would ensue. How small, then, would be the proportion of the six millions (in itself so unequal a representative) which the public would be able to extract in revenue. It must either have little or no revenue, or it must receive its dues in kind; on the inefficacy and inconveniences of which mode, I have already remarked. The necessity for it, in part, unhappily now has place, for the cause assigned, a deficiency of current cash: but were we to establish it as our principal dependence, it would be impossible to contrive a mode less productive to the public, more contrary to the habits and inclinations of the people, or more baneful to industry.

But waiving the objections on this head, there would still remain a balance of four millions of dollars more than these States can furnish in revenue, which must be provided for the yearly expense of the war. How is this to be procured without a paper credit, to supply the deficiency of specie, and enable the moneyed men to lend? This question, I apprehend, will be of no easy solution.

In the present system of things, the health of a State, particularly a commercial one, depends on a due quantity and regular circulation of cash, as much as the health of an animal body depends upon the due quantity and regular circulation of the blood. There are indisputable indications that we have not a sufficient medium; and what we have is in continual fluctuation. The only cure to our public disorders, is to fix the value of the currency we now have, and increase it to a proper standard, in a species that will have the requisite stability.

The error of those who would explode paper money altogether, originates in not making proper distinctions. Our paper was, in its nature, liable to depreciation, because it had no funds for its support, and was not upheld by private credit. The emissions under the resolution of March, ?80, have partly the former advantage, but are destitute of the latter, which is equally essential. No paper credit can be substantial, or durable, which has no funds, and which does not unite, immediately, the interest and influence of the moneyed men, in its establishment and preservation. A credit begun on this basis, will, in process of time, greatly exceed its funds: but this requires time and a well-settled opinion in its favor. ?T is in a national bank, alone, that we can find the ingredients to constitute a wholesome, solid, and beneficial credit.

I am aware that, in the present temper of men?s minds, it will be no easy task to inspire a relish for a project of this kind: but much will depend on the address and personal credit of the proposer. In your hands I should not despair: and I should have the greater hopes for what I am informed appeared to be the disposition, at the promulgation of the plan for a loan in Massachusetts. The men of property in America are enlightened about their own interest, and would easily be brought to see the advantages of a good plan. They ought not to be discouraged at what has happened heretofore, when they behold the administration of our finances put into a better channel. The violations of public engagements, hitherto, have proceeded more from a necessity produced by ignorance and mismanagement, than from levity or a disregard to the obligations of good faith.

Should the success, in the first instance, not be as complete as the extent of the plan requires, this should not hinder its being undertaken. It is of the nature of a bank, wisely instituted, and wisely administered, to extend itself, and, from small beginnings, grow to a magnitude that could not have been foreseen.

The plan I propose requires a stock of three millions of pounds, lawful money; but if one half the sum could be obtained, I should entertain no doubt of its full success. It now remains to submit my plan, which I rather offer as an outline, than as a finished plan. It contains, however, the general principles. To each article I shall affix an explanatory remark.

Art. I. A bank to be erected with a stock of three millions of pounds, lawful money, at the rate of six shillings to a dollar, divided into thirty thousand shares. This stock to be exempted from all public taxes and impositions whatsoever.

Remark 1. By the second Article, a part of the stock is to be in landed security; by this, the whole is to be exempted from taxes. Here will be a considerable saving to the proprietor, which is to be estimated among the clear profits of the bank. This will indeed be a small reduction of the public revenue; but the loss will be of little consequence, compared with the advantages to be derived from the bank.

Art. II. A subscription to be opened for the amount of the stock. A subscriber of from one share to five, to advance the whole in specie. A subscriber of six shares to fifteen, to advance one half in specie, the other half in good landed security. A subscriber of sixteen shares, and upwards, to advance two sixths in specie, one sixth in bills of securities on good European funds, and three sixths in good landed security. In either case of specie, plate or bullion, at a given value, proportioned to its quality, may be substituted; and in either case of landed security, specie, good bills, or securities on European funds, to be admissible in their stead.1

Remark 2. By admitting landed security as a part of the bank stock, while we establish solid funds for the money emitted, we at the same time supply the defect of specie, and we give a strong inducement to moneyed men to advance their money; because, not only the money actually deposited is to be employed for their benefit, but, on the credit of their landed security, by the seventh Article, may be raised an equal amount in cash, to be also employed for their benefit; by which artifice they have the use of their land (exempted, too, from taxes), and the use of the value of it in a representative cash. In this consists a capital advantage of the bank to the proprietors. A, for instance, advances six hundred pounds in specie, and as much more in landed security. By the establishment he may draw bank-notes for the whole of his stock, that is, for twelve hundred pounds, when he only advances half the sum in money. These bank-notes operating as cash, his land (continuing as we observed above, in his own use, with the privilege besides of an exemption from taxes) is converted into cash; which he may employ in loans, in profitable contracts, in beneficial purchases, in discounting bills of exchange, and in the other methods permitted in the subsequent Articles. Besides all this, when the bank-notes have once acquired a fixed credit, he is not obliged to keep his six hundred pounds, deposited in specie, idle; he may lend or otherwise improve, a part of that also. These advantages will not exist in their full extent at first, but they will soon succeed each other.

Art. III. The bank to be erected into a legal corporation; to have all the powers and immunities requisite to its security, to the recovery of its debts, and to the disposal of its property.

Remark 3. This Article needs no illustration.

Art. IV. The stock of the bank not to be liable to any attachment or seizure whatsoever; but, on refusal of payment, the holders of bank-notes, or bonds, may enter suit against any member, or members, of the corporation; and, as far as their respective shares in the bank extend, recover the debt, with cost and damages, out of their private property.

Remark 4. The first part of this regulation is necessary to engage foreigners to trust their property in the bank; the latter part to give an idea of security to the holders of bank-notes.

Art. V. The United States, or any particular States, or foreigners, may become subscribers to the bank, and participate in its profits, for any sums not exceeding the whole half the stock.

Remark 5. This will link the interests of the public more intimately with the bank, and be an easy method of acquiring revenue. It will also facilitate the making up its stock by the loans which Congress may obtain abroad; without which it would be more difficult to raise so large a sum. It is essential the stock should be large, because, in proportion to it, will be the credit of the bank, and of course its ability to lend and enlarge its paper emissions. The admission of foreigners will also assist the completing the stock; and it is probable many may be induced to enter into the plan, especially after it has made some progress among ourselves, and obtained a degree of consistency.

The sum is limited to one half the stock, because it is of primary importance that the moneyed men among ourselves should be deeply interested in the plan.

Art. VI. The United States, collectively and particularly, to become responsible for all the transactions of the bank, conjointly with the private proprietors.

Remark 6. This mode of pledging the public faith makes it as difficult to be infringed as could possibly be devised. In our situation it is expedient to offer every appearance of security. Foreigners are more firmly persuaded of the establishment of our independence than of the continuance of our union; and will, therefore, have more confidence in the States bound separately than collectively. Individuals among ourselves will be influenced by similar considerations.

Art. VII. The bank to issue notes payable at sight in pounds, shillings, and pence, lawful; all of twenty shillings, and under, to bear no interest; all above, to bear an interest not exceeding four per cent. The notes to be of so many denominations as may be judged convenient for circulation, and of two kinds; one payable only in America, the other payable either in America or in any part of Europe where the bank may have funds. The aggregate of these notes never to exceed the bank stock.

Remark 7. The reason of having them payable at sight is to inspire the greater confidence and give them a readier currency; nor do I apprehend there would be any danger from it. In the beginning some may be carried to the bank for payment, but finding they are punctually discharged, the applications will cease. The notes are payable in pounds, shillings, and pence, rather than in dollars, to produce an illusion in the minds of the people favorable to the new paper; or rather to prevent their transferring to that their prejudices against the old. Paper credit depends much on opinion, and opinion is often guided by outside appearances. A circumstance trivial as this may seem, might have no small influence on the popular imagination. And if twenty shillings, and under, are without interest, because such small sums will be diffused in the lesser transactions of daily circulation, there will be less probability of their being carried to the bank for payment.

The interest on the larger notes is calculated to give them a preference to specie, and prevent a run upon the bank. The notes, however, must be introduced by degrees, so as not to inundate the public at once. Those bearing no interest ought not to be multiplied too much at first; but as the interest is an abridgment of the profits of the bank, after the notes have gained an unequivocal credit, it will be advantageous to issue a large proportion of the smaller ones. At first, the interest had best be at four per cent., to operate the more effectually as a motive; afterward, on the new notes, it may be gradually diminished; but it will always be expedient to let them bear an interest not less than two per cent.

The making some of the notes payable in Europe as well as in America, is necessary to enable the bank to avail itself of its funds there; it will also serve to raise the demand for bank-notes, by rendering them useful in foreign commerce, the promoting which is a further inducement.

The limiting the aggregate of the notes to the amount of the stock, is necessary to obviate a suspicion of their being multiplied beyond the means of redemption.

Art. VIII. The bank to lend money to the public, or to individuals, at an interest not exceeding eight per cent.

Remark 8. In the beginning it will be for the advantage of the bank to require high interest, because the money is in great demand, and the bank itself will want the principal part of its cash for the loans stipulated in Article XIII., and for performing the contracts authorized by Article XII.; so that the profits will not, for some time, turn materially on the principle of loans, except that to the public. But when the contracts cease, the bank will find its advantage in lending, at a moderate interest, to secure a preference from borrowers, which will, at the same time, promote commerce; and by a kind of mutual reaction, the bank will assist commerce, and commerce will assist the bank.

Art. IX. The bank to have liberty of borrowing, on the best terms it can, to the amount of one half of its stock.

Remark 9. This is a precaution against a sudden run. It may borrow in proportion to what it pays. It has another advantage: at particular conjunctures the bank may borrow at a low interest, and lend, at others, at a higher.

Art. X. The bank to have liberty of purchasing estates by principal, or by annuities; the power of coining to the amount of half its stock, the quantity of alloy, etc., being determined by Congress; also the power of discounting bills of exchange.

Remark 10. This privilege of purchasing estates will be a very valuable one. By watching favorable opportunities, with so large a capital, vast property may be acquired in this way. There will be a fine opening at the conclusion of the war. Many persons disaffected to our independence, who have rendered themselves odious without becoming obnoxious to the laws, will be disposed to sell their estates here, either for their whole value, or for annuities in Europe. The power of coining1 is necessary, as plate, or bullion, is admitted instead of specie; and it may be, on particular occasions, expedient to coin them; this will be a small resource to the bank. The power of discounting bills of exchange will be a considerable one. Its advantages will consist in purchasing, or taking up for the honor of the drawer, when the security is good, bills of exchange at so much per cent. discount. A large profit might be now made in this way on the bills drawn on France; and hereafter, in times of peace, when commerce comes to flourish, this practice will promote the transactions of the several States with each other, and with Europe, and will be very profitable to the bank.

Art. XI. The bank to receive from individuals deposits of any sums of money, to be repaid when called for, or passed, by order, to the credit of others; or deposits of plate, paying a certain annual rate for safe-keeping. Whatever is deposited in the bank, to be exempt from taxes.

Remark 11. This is in imitation of the Bank of Amsterdam. If individuals once get into the practice of depositing their money in bank, it will give credit to the bank, and assist trade. In time, a premium may be required at repayment as in Holland. A small profit may be immediately gained on plate, as the States begin to tax this article; and many persons will dispense at this time with the use of their plate, if they can deposit it in a place of safety, and pay less for keeping it than the tax. Whatever serves to increase the apparent wealth of the bank, will enhance its credit! It may even be useful to let the owners of the plate have credit in bank for the value of the plate, estimated on a scale that would make it for the advantage of the bank to purchase.

Art. XII. The bank to have a right to contract with the French Government for the supply of its fleets and armies in America, and to contract with Congress for the supply of their armies.

Remark 12. It will be of great importance to the success of the subscriptions, that a previous assurance of these contracts should take place: the profits of them would be no trifling inducement to adventures; it would have the air of employing the money subscribed in trade. As soon, therefore, as the plan should be resolved upon, negotiations should be begun for the purpose. It is so clearly the interest of the French Government to enter into these contracts, that they must be blind not to do it, especially when it is proposed under the aspect of a method of re-establishing our finances. The present loss on their bills is enormous. The bank may engage to receive them at a moderate discount, and to supply on better terms than they now make. Their business is at this time trusted to a variety of hands, some of which are neither very skilful nor very honest: competitions, frauds, and additional expense, are the consequences.

Congress could not hesitate on their part, as the amount of the contracts would be a part of the loan required in Article XIII.

Art. XIII. The bank to lend Congress one million two hundred thousand pounds, lawful, at eight per cent. interest; for the payment of which, with its interest, a certain unalienable fund of one hundred and ten thousand four hundred pounds per annum, to be established for twenty years. The States, generally and severally, to pledge themselves for this sum, and for the due appropriation of the fund. Congress to have a right, at any intermediate period, to pay off the debt, with the interest to the time of payment. The same rule to govern in all future loans.

Remark 13. This loan will enable Congress to get through the expenses of the year. There may be a small deficiency, but this will be easily supplied. The credit of the bank once established, it may increase its stock, and lend an equal sum every year during the war. This loan may be advanced, partly in a contract for provisions, clothing, etc., and partly in cash, at periodical payments, to avoid a too quick multiplication of bank-notes.

Art. XIV. The bank to become responsible for the redemption of all the paper now emitted; the old, at forty for one in thirty years, the new at par, with gold and silver, according to the terms promised by Congress in their resolution of March, ?80. One third of the first to be redeemed at the end of every ten years; and the whole of the last to be redeemed at the expiration of the six years specified by Congress, with the interest of five per cent. The United States, in compensation for this responsibility, to establish certain funds for an annuity, payable to the bank, equal to the discharge of the whole amount of the paper currency in thirty years, with an interest of two per cent. per annum.

Remark 14. It is of the greatest importance that the old currency should be fixed at a certain value, or there will be danger of its infecting the future paper; besides, we want to raise it to a point that will make it approach nearer to an adequate medium. I have chosen the resolution of March, ?80, as a standard. We ought not, on any account, to raise the value of the old paper higher than forty to one, for this will give it about the degree of value that is most salutary; at the same time that it will avoid a second breach of faith, which would cause a violent death to all future credit. A stable currency is an idea fundamental to all practicable schemes of finance. It is the duty and interest of the public to give stability to that which now exists; and it will be the interest of the bank, which alone can effect it, to co-operate. I have not mentioned the amount of the annuity to be paid by Congress, because I have not materials to judge what quantity of paper money now exists; since it will be necessary to take all the State emissions into the calculation. I suppose (including State emissions) there may be about four hundred millions of dollars of the old standard, and about four millions of the new.1 This will give us, in specie-value, about fourteen millions of dollars. This is what the bank is to become answerable for, and what the public is to pay, by an annuity of thirty years, with two per cent. interest. This annuity would amount to six hundred and eleven thousand three hundred and thirty-three and one third dollars, for which funds are to be provided.

By a rough calculation, I find that the bank would gain, in the thirty years, about three millions of dollars, on the simple footing of interest; and that it will, at different periods, have more public money in its possession than it will be in advance at others; so that, upon the whole, the sum it will gain in interest will be for the loan of its credit to the public, not of any specific sum of cash. Besides, the interest of the bank may gain a very considerable sum by the purchases it may make of the old paper at its current value, before the influence of this plan has time to bring it back to the point at which it is intended to be fixed.1 It is the obvious interest of the United States to concur in this plan, because, by paying three millions of dollars in interest to the bank, more than it would have to pay to the money-holders, agreeably to its present engagements, it would avoid a new breach of faith, fix its circulating medium increased in value more than one half, render the taxes more productive, and introduce order into its finances, without which our independence is lost. It will also have only about two thirds of the funds to establish for this plan that are required by the act of March, ?80, to discharge the new bills; it will, of course, reserve a large balance toward the current expenses, which is no insignificant consideration.

Perhaps it may be imagined that the same funds established for the redemption of the money in the same time, without passing through the bank, would have an equal effect upon its credit, and then we should save the interest of two per cent. Experience proves the contrary. We find the new notes depreciating in the States which have provided good funds. The truth is, there is not confidence enough in any funds merely public. The responsibility of the bank would beget a much stronger persuasion of the paper being redeemed, and have incomparably more efficacy in raising and confirming its credit. Besides, the bank might immediately reduce the quantity by purchase, which the public could not do.

It will be observed that of the six millions of dollars which constitute our annual revenue, I require nine hundred and seventy-nine thousand three hundred and thirty-three and one third dollars, in funds, to reimburse the loan for the first year, and pay off the annuity for the redemption of the old paper. It may be asked, where these funds are to be procured in the present impotence of our Federal Government. I answer, there are ample means for them, and they must be had. Congress must deal plainly with their constituents. They must tell them that power without revenue is a bubble; that unless they give them substantial resources of the latter, they will not have enough of the former either to prosecute the war or to maintain the Union in peace; that, in short, they must, in justice to the public and to their own honor, renounce the vain attempt of carrying on the war without either, a perseverance in which, can only deceive the people, and betray their safety. They must demand an instant, positive, and perpetual investiture of an impost on trade; a land tax and a poll tax, to be collected by their own agents. This act to become a part of the Confederation.

It has ever been my opinion that Congress ought to have complete sovereignty in all but the mere municipal law of each State; and I wish to see a convention of all the States, with full power to alter and amend, finally and irrevocably, the present futile and senseless Confederation.

The taxes specified may be made to amount to three millions of dollars; the other three millions to be raised by requisition, as heretofore.

Art. XV. The bank-notes to be received in payment of all public customs and taxes, at an equivalent with gold and silver.

Remark 15. It is essential that all taxes should be raised, throughout the United States, in specie, or bank-notes at par, or the old paper at its current value at the time of payment. This will serve to increase the circulation and credit of the bank-notes; but no person should be obliged to receive them in private dealings. Their credit must depend on opinion; and this opinion would be injured by legislative interposition.

Art. XVI. The bank to dissolve itself whenever it thinks proper, making effectual provision for the payment of its debts; and a proprietor of bank stock to have the privilege of selling out whenever he pleases.

Remark 16. This permission to dissolve or sell at pleasure will encourage men to adventure; and, when once engaged, the profits will make them willing to continue.

Art. XVII. The bank to be established for thirty years by way of experiment.

Remark 17. This is chiefly to prevent some speculative men being alarmed, who, upon the whole, may think a paper credit detrimental and dangerous, though they would be willing, from necessity, to encourage it for a limited time. Experience, too, may show the defects of this plan, and give rise to alterations for the better.

Art. XVIII. No other bank, public or private, to be permitted during that period.

Remark 18. Other banks might excite a competition prejudicial to the interests of this, and multiply and diversify paper credit too much.

Art. XIX. Three banks to be erected in Massachusetts, Pennsylvania, and Virginia, to facilitate the circulation and payment of the bank-notes.

Remark 19. These banks ought to be in the interior of the country, remote from danger, with every precaution for their security in every way. Their distance from the capital trading points will be an advantage, as it will make applications for the payment of bank-notes less convenient.

Art. XX. The affairs of the bank to be managed by twelve general directors, men of reputation and fortune; eight of them to be chosen by the private proprietors, and four by Congress. The Minister of Finance to have the privilege of inspecting all their proceedings.

Remark 20. It is necessary, for reciprocal security of the public, the proprietors, and the people, that the affairs of the bank should be conducted under a joint direction.

These, as has been already observed, are only intended as outlines; the form of administration for the bank, and all other matters, may be easily determined, if the leading principles are once approved. We shall find good models in the different European banks, which we can accommodate to our circumstances. Great care, in particular, should be employed to guard against counterfeits; and I think methods may be devised that would be effectual.

I see nothing to prevent the practicability of a plan of this kind, but a distrust of the final success of the war, which may make men afraid to risk any considerable part of their fortunes in the public funds: but, without being an enthusiast, I will venture to assert, that, with such a resource as is here proposed, the loss of our independence is impossible. All we have to fear is, that the want of money may disband the army, or so perplex and enfeeble our operations as to create in the people a general disgust and alarm, which may make them clamor for peace on any terms. But if a judicious administration of our finances, assisted by a bank, takes place, and the ancient security of property is restored, no convulsion is to be apprehended. Our opposition will soon assume an aspect of system and vigor, that will relieve and encourage the people, and put an end to the hopes of the enemy. ?T is evident that they have it not in their power to subdue us by force of arms. In all these States they have not more than fifteen thousand effective troops, nor is it possible for them much to augment this number. The East and West Indies demand reinforcements. In all the islands, they have not, at this time, above five thousand men; a force not more than equal to the proper garrisoning of Jamaica alone; and which, the moment they lose a maritime superiority in those seas, will leave them much cause to fear for their possessions. They will probably send out fifteen hundred to two thousand men, to recruit their regiments already here; but this is the utmost they can do.

Our allies have five thousand men at Rhode Island, which, in the worst event that can happen, will be recruited to eight, to co-operate with us on a defensive plan. Should our army amount to no more than fifteen thousand men, the combined forces, though not equal to the expulsion of the enemy, will be equal to the expulsion of the enemy, will be equal to the purpose of compelling them to renounce their offensive, and to content themselves with maintaining one or two capital points. This is on the supposition that the public have the means of putting their troops in activity. By stopping the progress of their conquests, and reducing them to an unmeaning and disgraceful defensive, we destroy the national expectation of success, from which the ministry draw their resources. It is not a vague conjecture, but a fact founded on the best information, that, had it not been for the capture of Charleston and the victory of Camden, the ministry would have been in the utmost embarrassment for the supplies of this year. On the credit of those events they procured a loan of five and twenty millions. They are in a situation where a want of splendid success is ruin. They have carried taxation nearly to its extreme boundary; they have mortgaged all their funds; they have a large unfunded debt, besides the enormous mass which is funded. This must necessarily create apprehensions in their most sanguine partisans; and if these are not counteracted by flattering events, from time to time, they cannot much longer continue the delusion. Indeed, in this case, I suppose they must themselves despair.

The game we play is a sure game, if we play it with skill. I have calculated, in the preceding observations, on the most disadvantageous side. Many events may turn up, in the course of the summer, to make even the present campaign decisive.

If we compare the real ability of France, for revenue, with that of Great Britain; the economy and sagacity in the conduct of the finances of the former; the extravagance and dissipation which are overwhelming those of the latter; there will be found every reason to believe that the resources of France will outlast those of her adversary. Her fleet is not much inferior, independent of that of Spain and Holland. Combined with that of Spain, it is greatly superior. If the Dutch enter into the war in earnest, and add their fleet, the superiority will be irresistible. Notwithstanding the injury they may sustain in the first instance, the Dutch will be still formidable: they are rich in credit, and have extensive means for maritime power.

Except the Emperor, who is hostile, and the Dane, who is neutral, all the rest of Europe are either friends to France or to our independence.

Never did a nation unite more circumstances in its favor than we do; we have nothing against us but our own misconduct.

There are two classes of men among us, equally mistaken: one who, in spite of daily experience, of accumulated distress, persist in a narrow line of policy, and, amidst the most threatening dangers, fancy every thing in perfect security. Another, who, judging too much from the outside, alarmed by partial misfortunes and the disordered state of our finances, without estimating the real faculties of the parties, give themselves up to an ignorant and ill-founded despondency. We want to learn to appreciate our true situation and that of the enemy. This would preserve us from a stupid insensibility to danger on the one hand, and inspire us with a reasonable and enlightened confidence on the other.

But let us suppose the worst?that we shall, after all, fail in our independence; our return to Great Britain, whenever it should happen, would be by compact. The war would terminate by a mediation. It cannot be supposed that the mediator would be so devoted to Great Britain, or would have so little consideration for France, as to oblige us to revert to our former subjection by an unconditional surrender. While they might confirm his dominion over us, they would endeavor to save appearances for the honor of France, and stipulate terms as favorable to us as would be compatible with a state of dependence. A general amnesty, and security of private property (of course, the payment of public debts), would be among the most simple and most indispensable. This would comprehend the concerns of the bank; and if, unfortunately for our virtue, such a circumstance could operate as an inducement, it might be added that our enemies would be glad to find and to encourage such an institution among us for their own benefit.

A question may arise concerning the abilities of these States to pay their debts after the establishment of their independence; and though any doubt on this head must originate from gross ignorance, it may be necessary to oppose it with more than general argument, as has been done heretofore. A very summary and obvious calculation will show that there is nothing to be dreaded on this head.

The funds of nine hundred and seventy-nine thousand three hundred and thirty-three and one third dollars, proposed to be established for paying off the loan of the first year and for redeeming the present paper,

Source: http://delong.typepad.com/sdj/2012/03/origins-of-american-finance.html

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