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
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.
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.
If I read Smith correctly, he said that the use of paper money could double the total value of transactions that take place in the economy. That was in 1776.
ReplyDeleteIn 1790 Hamilton said paper money could lead to two or three times the value of transactions that take place using gold and silver money. Double or even triple, he said, not just double.
In Chapter 23 Keynes quotes Heckscher quoting the head of the East India Company from 1668, who said that using "bills of debt" as "currency" (that is, using a form of paper money) “will certainly supply the defect [read: deficiency] of at least one-half of all the ready money we have in use in the nation”.
The estimates, chronologically:
in 1668, a 50% increase in economic activity;
in 1776, a 100% increase in economic activity; and
in 1790, a 100% to 200% increase in economic activity,
due to the use of paper money.
These days we don't use gold and silver for money. We have "base money" instead. In the mid-1980s the quantity of M2 money briefly reached 12 times the quantity of base money. It should be noted, however, that two decades later, when private-sector debt was much higher, 9 times the quantity of base money was not enough to prevent financial crisis.
https://fred.stlouisfed.org/graph/?g=12f2h