The same distinguished critic differs from the chairman of the committee of ways and means, as to the effect of an increase of money in producing depreciation. The proposition controverted is thus stated by Mr. M'Duffie in the Report.
"No proposition is better established than that the value of money, whether it consists of specie or paper, is depreciated in exact proportion to the increase of its quantity, in any given state of the demand for it. If, for example, the banks, in 1816, doubled the quantity of the circulating medium by their excessive issues, they produced a general degradation of the entire mass of the currency, including gold and silver, proportioned to the redundancy of the issues, and wholly independent of the relative depreciation of bank paper at different places as compared with specie. The nominal money price of every article was of course one hundred per cent. higher than it would have been, but for the duplication of the quantity of the circulating medium. Money is nothing more nor less than the measure by which the relative value of all articles of merchandise is ascertained. If, when the circulating medium is fifty millions, an article should cost one dollar, it would certainly cost two, if, without any increase of the uses of a circulating medium, its quantity should be increased to one hundred millions. This rise in the price of commodities, or depreciation in the value of money, as compared with them, would not be owing to the want of credit in the bank bills, of which the currency happened to be composed. It would exist, though these bills were of undoubted credit, and convertible into specie at the pleasure of the holder, and would result simply from the redundancy of their quantity. It is important to a just understanding of the subject, that the relative depreciation of bank paper at different places, as compared with specie, should not be confounded with this general depreciation of the entire mass of the circulating medium, including specie."
Although the principle appears to us to be laid down somewhat too broadly by Mr. M'Duffie, as we shall presently state, yet he is supported in his position, to the letter, by Hume, by Mr. Jefferson, and virtually by Adam Smith, if we suppose that from any cause the excess of gold and silver, which causes the depreciation, cannot be exported. They all agree in this, that the amount of money which can circulate, and which does in fact circulate in any country, depends upon the number and value of its exchanges, and that, as its quantity increases, its value diminishes. But Hume and Smith, concurring in this general principle, drew very different inferences from it as to the paper currency of banks. Hume thought that the equilibrium between the money required for the country and that in circulation, was effected by depreciation; while Smith considered, that it was maintained by an exportation of the precious metals in proportion to the increase of paper. And the general principle thus ably supported by authority, was all, no doubt, that Mr. M'Duffie meant to assert. There is then probably no real difference between him and his reviewer in the North American.
We conceive that Mr. M'Duffie, in his application of the principle to our own situation, twelve or fifteen years since, has not greatly overrated the depreciation, if we regard the effect of the increase of money on every species of exchangeable value; but that it was very different with the different kinds. This difference requires explanation; but first, of the general principle itself, which, it seems to us, must be received with some qualification.
The effect of an increase of money is certainly to diminish its value; but the extent of the diminution is one of those nice problems in political economy which has never been accurately settled. It has not yet been adjusted to a formula which will explain all the facts attending such increase. Although the quantity of money required in a country mainly depends upon the number and value of its purchases in a given time, yet with the same amount of these, much less money may be in circulation at one time than another. There are various expedients and substitutes for supplying a temporary deficiency of currency, which make the quantity of money in a commercial country a variable one, capable of considerable contraction or expansion. The actual money can be more or less aided by credit. A farmer, a horse-dealer, a shopkeeper, a mechanic—will all wait with a substantial purchaser for their money, rather than lose the sale of their commodities; and a sudden rise in the price of the staples of the country, such as our own often experience, while it increases the demand for money, proportionally improves the credit of individuals, and fits it as a substitute for cash. Money too may be much more active at one time than another; and when there has been a considerable increase of it, the greater comparative idleness of a part of it, in the strong boxes or pocket-books of individuals, may prevent or lessen its depreciation. These circumstances, and others which might be added, all inappreciable except by approximations, prevent the value of money from either rising or falling, in exact proportion to its increase or decrease in quantity.
To this qualification of the general principle, we would add another. When the money of a country has been considerably increased, and the excess cannot be exported, as was the case with our paper currency during the suspension of cash payments, the depreciation is much greater upon some articles than others. Its effect is least upon those commodities which find a market abroad, because the price there regulates the price here. It is by reason of this irregularity that depreciation is often so disguised as not to be perceptible to all, and that sometimes it is a matter of dispute whether it exists or not; as was the case in England in the controversy between the bullionists and their opponents, concerning the fact of the depreciation of their bank paper during the suspension of cash payments.
But if the increase of the currency has little effect on the prices of some articles, it has the greater on those for the estimation of which there is no such definite standard—as lands, town lots, and houses—and those domestic products which look exclusively to domestic consumption for a market, as butchers' meat, game, &c. All these took a prodigious rise in all parts of the Union, and most men mistaking the effect of a redundancy of money for a real rise of price consequent on our increased population and capital, believed that real estate was the best investment they could make of their money, and purchased it accordingly—looking for remuneration, not to the rent or immediate profit, but to that future rise in value which was inferred from the past. This erroneous opinion brought capitalists into the market for real estate, and the competition created by their money, and that which others borrowed from the banks, raised the price extravagantly high. A natural though singular result of this state of things was, that those who had sold lands or lots at these factitious prices, could have made no use of their money that would have been so profitable as not using it at all; and the policy of hoarding, usually as unwise as it is odious, would have been, on this occasion, the most rational and gainful that could have been pursued.
If, then, we take the prices of every species of merchandise among us, together with that of real estate, we believe it will be found that such average of prices then, is very near double of what it is now; and consequently that Mr. M'Duffie's estimate of the late depreciation of our currency was not extravagant. But granting that it was exaggerated, he appears to us to have taken juster views than his critic, of its pernicious effects, as well as of the agency of the bank in arresting them; and we must think that he is the safer physician, who merely overrates the danger of a disease, than he, who, though he rightly judges it not mortal, mistakes both its cause and its remedy.
We think, too, that the report of the committee was correct in supposing, that the depreciation would not have taken place, if the Bank of the United States had then been in existence. At any rate it would have been postponed, and if not prevented altogether, under the disadvantages of having neither a navy to protect our commerce, nor manufactures to supply its place, it would have been greatly mitigated. It is probable that the suspension of cash payments would not have taken place at all, if the bank had followed the prudent course of the banks of Boston, and not lent its money to the government; but though it had, its paper would have been more nearly at par and more uniform than that of the state banks, which varied in value according to the public opinion of their prudence and solidity, as well as of the varying quantity of notes thrown into circulation in different places. It is possible that the national bank, being conducted with greater skill and knowledge of banking, would have seen that they could not safely accommodate the government with any large loan, and that when they were reduced to the dilemma of either suspending cash payments and having a depreciated currency, or of maintaining the currency sound, by withholding assistance to the government, they would have preferred the latter; and that the government would have been thereby induced to resort sooner than they did to a system of taxation to support the war. It is indeed impossible to say, at this time, what would have been the precise result if we had possessed a national bank, but we think that this much may be affirmed with confidence, that the depreciation of its notes would have been far less, would have been uniform, and would have taken the place of much paper which had no solid foundation for the short-lived credit it obtained.
It remains for us now to see what will be the extent of the immediate pecuniary cost to the nation for pulling down the Bank of the United States, and building up the Treasury Bank on its ruins. This view is intelligible to all, and there are minds who will give more weight to this objection than that of increasing executive influence.