The Writings of Thomas Jefferson, Vol. 6 (of 9) / Being His Autobiography, Correspondence, Reports, Messages, Addresses, and Other Writings, Official and Private

by Thomas Jefferson

Let us examine these causes and proofs of the want of an increase of medium, one by one.

1. The additional industry created to supply a variety of articles for troops, ammunition, &c. Now, I had always supposed that war produced a diminution of industry, by the number of hands it withdraws from industrious pursuits for employment in arms, &c., which are totally unproductive. And if it calls for new industry in the articles of ammunition and other military supplies, the hands are borrowed from other branches on which the demand is slackened by the war; so that it is but a shifting of these hands from one pursuit to another.

2. The cash sent to the frontiers occasions a vacuum in the trading towns, which requires a new supply. Let us examine what are the calls for money to the frontiers. Not for clothing, tents, ammunition, arms, which are all bought in the trading towns. Not for provisions; for although these are bought partly in the immediate country, bank bills are more acceptable there than even in the trading towns. The pay of the army calls for some cash, but not a great deal, as bank notes are as acceptable with the military men, perhaps more so; and what cash is sent must find its way back again in exchange for the wants of the upper from the lower country. For we are not to suppose that cash stays accumulating there forever.

3. This scarcity has been occasioned by the late loans. But does the government borrow money to keep it in their coffers? Is it not instantly restored to circulation by payment for its necessary supplies? And are we to restore a vacuum of twenty millions of dollars by an emission of ninety millions?

4. The want of medium is proved by the recurrence of individuals with good paper to brokers at exorbitant interest; and

5. By the numerous applications to the State governments for additional banks; New York wanting eighteen millions, Pennsylvania ten millions, &c. But say more correctly, the speculators and spendthrifts of New York and Pennsylvania, but never consider them as being the States of New York and Pennsylvania. These two items shall be considered together.

It is a litigated question, whether the circulation of paper, rather than of specie, is a good or an evil. In the opinion of England and of English writers it is a good; in that of all other nations it is an evil; and excepting England and her copyist, the United States, there is not a nation existing, I believe, which tolerates a paper circulation. The experiment is going on, however, desperately in England, pretty boldly with us, and at the end of the chapter, we shall see which opinion experience approves: for I believe it to be one of those cases where mercantile clamor will bear down reason, until it is corrected by ruin. In the meantime, however, let us reason on this new call for a national bank.

After the solemn decision of Congress against the renewal of the charter of the bank of the United States, and the grounds of that decision, (the want of constitutional power,) I had imagined that question at rest, and that no more applications would be made to them for the incorporation of banks. The opposition on that ground to its first establishment, the small majority by which it was overborne, and the means practiced for obtaining it, cannot be already forgotten. The law having passed, however, by a majority, its opponents, true to the sacred principle of submission to a majority, suffered the law to flow through its term without obstruction. During this, the nation had time to consider the constitutional question, and when the renewal was proposed, they condemned it, not by their representatives in Congress only, but by express instructions from different organs of their will. Here then we might stop, and consider the memorial as answered. But, setting authority apart, we will examine whether the Legislature ought to comply with it, even if they had the power.

Proceeding to reason on this subject, some principles must be premised as forming its basis. The adequate price of a thing depends on the capital and labor necessary to produce it. [In the term capital, I mean to include science, because capital as well as labor has been employed to acquire it.] Two things requiring the same capital and labor, should be of the same price. If a gallon of wine requires for its production the same capital and labor with a bushel of wheat, they should be expressed by the same price, derived from the application of a common measure to them. The comparative prices of things being thus to be estimated and expressed by a common measure, we may proceed to observe, that were a country so insulated as to have no commercial intercourse with any other, to confine the interchange of all its wants and supplies within itself, the amount of circulating medium, as a common measure for adjusting these exchanges, would be quite immaterial. If their circulation, for instance, were of a million of dollars, and the annual produce of their industry equivalent to ten millions of bushels of wheat, the price of a bushel of wheat might be one dollar. If, then, by a progressive coinage, their medium should be doubled, the price of a bushel of wheat might become progressively two dollars, and without inconvenience. Whatever be the proportion of the circulating medium to the value of the annual produce of industry, it may be considered as the representative of that industry. In the first case, a bushel of wheat will be represented by one dollar; in the second, by two dollars. This is well explained by Hume, and seems admitted by Adam Smith, B. 2. c. 2, 436, 441, 490. But where a nation is in a full course of interchange of wants and supplies with all others, the proportion of its medium to its produce is no longer indifferent. Ib. 441. To trade on equal terms, the common measure of values should be as nearly as possible on a par with that of its corresponding nations, whose medium is in a sound state; that is to say, not in an accidental state of excess or deficiency. Now, one of the great advantages of specie as a medium is, that being of universal value, it will keep itself at a general level, flowing out from where it is too high into parts where it is lower. Whereas, if the medium be of local value only, as paper money, if too little, indeed, gold and silver will flow in to supply the deficiency; but if too much, it accumulates, banishes the gold and silver not locked up in vaults and hoards, and depreciates itself; that is too say, its proportion to the annual produce of industry being raised, more of it is required to represent any particular article of produce than in the other countries. This is agreed by Smith, (B. 2. c. 2. 437,) the principal advocate for a paper circulation; but advocating it on the sole condition that it be strictly regulated. He admits, nevertheless, that "the commerce and industry of a country cannot be so secure when suspended on the Dædalian wings of paper money, as on the solid ground of gold and silver; and that in time of war, the insecurity is greatly increased, and great confusion possible where the circulation is for the greater part in paper." B. 2. c. 2. 484. But in a country where loans are uncertain, and a specie circulation the only sure resource for them, the preference of that circulation assumes a far different degree of importance, as is explained in my former letters.

The only advantage which Smith proposes by substituting paper in the room of gold and silver money, B. 2. c. 2. 434, is "to replace an expensive instrument with one much less costly, and sometimes equally convenient;" that is to say, page 437, "to allow the gold and silver to be sent abroad and converted into foreign goods," and to substitute paper as being a cheaper measure. But this makes no addition to the stock or capital of the nation. The coin sent out was worth as much, while in the country, as the goods imported and taking its place. It is only, then, a change of form in a part of the national capital, from that of gold and silver to other goods. He admits, too, that while a part of the goods received in exchange for the coin exported may be materials, tools and provisions for the employment of an additional industry, a part, also, may be taken back in foreign wines, silks, &c., to be consumed by idle people who produce nothing; and so far the substitution promotes prodigality, increases expense and corruption, without increasing production. So far also, then, it lessens the capital of the nation. What may be the amount which the conversion of the part exchanged for productive goods may add to the former productive mass, it is not easy to ascertain, because, as he says, page 441, "it is impossible to determine what is the proportion which the circulating money of any country bears to the whole value of the annual produce. It has been computed by different authors, from a fifth[6] to a thirtieth of that value." In the United States it must be less than in any other part of the commercial world; because the great mass of their inhabitants being in responsible circumstances, the great mass of their exchanges in the country is effected on credit, in their merchants' ledger, who supplies all their wants through the year, and at the end of it receives the produce of their farms, or other articles of their industry. It is a fact, that a farmer with a revenue of ten thousand dollars a year, may obtain all his supplies from his merchant, and liquidate them at the end of the year, by the sale of his produce to him, without the intervention of a single dollar of cash. This, then, is merely barter, and in this way of barter a great portion of the annual produce of the United States is exchanged without the intermediation of cash. We might safely, then, state our medium at the minimum of one-thirtieth. But what is one-thirtieth of the value of the annual produce of the industry of the United States? Or what is the whole value of the annual produce of the United States? An able writer and competent judge of the subject, in 1799, on as good grounds as probably could be taken, estimated it, on the then population of four and a half millions of inhabitants, to be thirty-seven and a half millions sterling, or one hundred and sixty-eight and three-fourths millions of dollars. See Cooper's Political Arithmetic, page 47. According to the same estimate for our present population, it will be three hundred millions of dollars, one-thirtieth of which, Smith's minimum, would be ten millions, and one-fifth, his maximum, would be sixty millions for the quantum of circulation. But suppose that instead of our needing the least circulating medium of any nation, from the circumstance before mentioned, we should place ourselves in the middle term of the calculation, to-wit: at thirty-five millions. One-fifth of this, at the least, Smith thinks should be retained in specie, which would leave twenty-eight millions of specie to be exported in exchange for other commodities; and if fifteen millions of that should be returned in productive goods, and not in articles of prodigality, that would be the amount of capital which this operation would add to the existing mass. But to what mass? Not that of the three hundred millions, which is only its gross annual produce, but to that capital of which the three hundred millions are but the annual produce. But this being gross, we may infer from it the value of the capital by considering that the rent of lands is generally fixed at one-third of the gross produce, and is deemed its nett profit, and twenty times that its fee simple value. The profits on landed capital may, with accuracy enough for our purpose, be supposed on a par with those of other capital. This would give us then for the United States, a capital of two thousand millions, all in active employment, and exclusive of unimproved lands lying in a great degree dormant. Of this, fifteen millions would be the hundred and thirty-third part. And it is for this petty addition to the capital of the nation, this minimum of one dollar, added to one hundred and thirty-three and a third or three-fourths per cent., that we are to give up our gold and silver medium, its intrinsic solidity, its universal value, and its saving powers in time of war, and to substitute for it paper, with all its train of evils, moral, political and physical, which I will not pretend to enumerate.