Sunday, January 15, 2012

Alexander Hamilton's "National Bank"


The St. Louis Fed offers FRASER, a "digital library of historic economic and banking publications and archival material". I went to The First and Second Banks of the United States, clicked Browse All Available Text, and selected this PDF:

National bank
Date: December 13, 1790
Authors: Hamilton, Alexander, 1757-1804

Citation:
Hamilton, Alexander, 1757-1804, 1790, National bank, from The First and Second Banks of the United States, accessed Dec 25, 2011 from FRASER, http://fraser.stlouisfed.org/docs/bankunitedstates/asp_v1_018.pdf

Well, aren't you in for a treat!



The "he" in the following excerpt is Hamilton:
Previously to entering upon the detail of this plan, he entreats the indulgence of the House towards some preliminary reflections naturally arising out of the subject, which he hopes will be deeded neither useless nor out of place. Public opinion being the ultimate arbiter of every measure of government, it can scarcely appear improper, in deference to that, to accompany the origination of any new proposition with explanations, which the superior information of those to whom it is immediately addressed, would render superfluous.

What a suck-up!

The following are among the principal advantages of a Bank:

First: The augmentation of the active or productive capital of a country. Gold and silver, when they are employed merely as the instruments of exchange and alienation, have been not improperly denominated dead stock; but when deposited in banks, to become the basis of a paper circulation, which takes their character and place, as the signs or representatives of value, they then acquire life, or, in other words, an active and productive quality...

It is a well established fact, that banks in good credit, can circulate a far greater sum than the actual quantum of their capital in gold and silver. The extent of the possible excess seems indeterminate; though it has been conjecturally stated at the proportions of two and three to one.

A quantity of money that is two or three times the quantity of gold and silver coin. Imagine that!

When Adam Smith wrote of it, some 24 years earlier, he estimated a quantity of paper money equal to the quantity of gold and silver coin:
When paper is substituted in the room of gold and silver money, the quantity of the materials, tools, and maintenance, which the whole circulating capital can supply, may be increased by the whole value of gold and silver which used to be employed in purchasing them. The whole value of the great wheel of circulation and distribution, is added to the goods which are circulated and distributed by means of it.
(Adam Smith, The Wealth of Nations, Book 2, Chapter 2)

All of that paper -- an amount equal to, or perhaps two or three times the total value of the coin of the realm -- is somebody's debt. Or more accurately, that paper was created when people took on debt.

Hamilton imagined a quantity of debt that was two or three times the quantity of gold and silver coin. Today we do not use gold and silver coin, so we cannot make that comparison. But at the peak in 2007, we had a quantity of debt that was 35 times the quantity of M1 money in circulation -- the money we receive as income.

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