Thomas Paine, Advocate of Sound Money and Banking

Bank of North America, classical liberalism, paper money, specie, Thomas Paine
Public Domain: This media is available in the holdings of the National Archives and Records Administration, cataloged under the ARC Identifier (National Archives Identifier) 530488 (

TPaine_smBetween writing his well-known revolutionary liberal tracts Common Sense (1776) and The Rights of Man (1791), Thomas Paine contributed knowledgeably to a 1785-6 debate over money and banking in Pennsylvania. Paine defended the Bank of North America’s charter and its operations in a number of lengthy letters to Philadelphia newspapers during 1786, followed by a December monograph that summarized his case, Dissertations on Government; The Affairs of the Bank; and Paper Money.[1]

Paine argued that to repeal the bank’s charter violated both the rule of law and the maxims of sound economic policy. His writings show that he well understood the benefits of banking. Although proponents of the repeal accused Paine, publicly known to be in dire financial shape, of being paid by the BNA’s proprietors for defending it (one called him "an unprincipled author, who lets his pen out for hire"), Paine vociferously denied the charge, and historians (such as Philip S. Foner, who edited an anthology of Paine’s works), have found no evidence to support the accusation. Prima facie evidence for Paine’s sincerity is found in his marshalling of serious arguments that were consistent with the classical liberal principles of his earlier writings.

Here’s the backstory: The Continental Congress chartered the Bank of North America, headquartered in Philadelphia and headed by Robert Morris and Thomas Willing in 1781. Considering a Commonwealth of Pennsylvania charter to be a sounder authorization, in 1782 the bank sought and received a charter from the Pennsylvania legislature. After the Revolutionary War’s end in 1783, as historian Janet Wilson noted, farmers in western Pennsylvania with large debts and tax arrears “set up a cry for paper money” to be issued by the Commonwealth.[2] These state-issued notes would not be presently redeemable, but would be receivable for future tax payments.

The inflationists understandably saw the BNA as a barrier to their plan. If the bank valued the state paper below its par value, while BNA banknotes and checks traded at par in terms of the silver dollars for which they could be immediately redeemed, real demand for the state paper currency would be low. Better for the sake of state paper to eliminate the superior alternative. Hence, with the legislature voting to authorize an issue of state notes in mid-1785, the inflationists demanded repeal of the bank’s charter. They were further motivated by the bank proprietors’ public opposition to state paper. The legislature debated and then repealed the charter in September 1785. The BNA continued to do business, on a smaller scale, under its 1781 charter from the Continental Congress. (The 1st US Congress would not meet until March 1789.) Eighteen months after repeal, in March 1787, following a pitched public discussion and the election of pro-bank legislators in fall 1786, the charter was restored.

The clamor for irredeemable paper money, wrote Paine in 1786, derived from “delusion and bubble.”[3] Yes, the irredeemable paper currency issued during the war as a matter of necessity had provided revenue “while it lasted,” but not as a free lunch, but rather by taxing individual money-holders through price inflation and currency depreciation. Since its demise, “gold and silver are become the currency of the country.”[4] Those thinking that state paper will relieve a “shortage” of specie have it backwards: it is precisely the issue of irredeemable paper that drives out gold and silver. On this point Paine argued with impeccable Humean logic:

The pretense for paper money has been, that there was not a sufficiency of gold and silver. This, so far from being a reason for paper emissions, is a reason against them. As gold and silver are not the productions of North America, they are, therefore, articles of importation; and if we set up a paper manufactory of money it amounts, as far as it is able, to prevent the importation of hard money, or to send it out again as fast it comes in; and by following this practice we shall continually banish the specie, till we have none left, and be continually complaining of the grievance instead of remedying the cause. Considering gold and silver as articles of importation, there will in time, unless we prevent it by paper emissions, be as much in the country as the occasions of it require, for the same reasons there are as much of other imported articles.[5]

Paine understood that any stimulus from injecting money was only temporary, because issuing more paper money does not create any more wealth. He even offered the binge drinking / hangover analogy that has, in modern times, become commonplace:

Paper money is like dramdrinking, it relieves for a moment by deceitful sensation, but gradually diminishes the natural heat, and leaves the body worse than it found it. Were not this the case, and could money be made of paper at pleasure, every sovereign in Europe would be as rich as he pleased. But the truth is, that it is a bubble and the attempt vanity.[6]

 State paper money became not just imprudent but unjust when it was combined with a legal tender law compelling the acceptance of depreciated paper dollars where a contract called for payment in silver or gold dollars:

As to the assumed authority of any assembly in making paper money, or paper of any kind, a legal tender, or in other language, a compulsive payment, it is a most presumptuous attempt at arbitrary power. … [A]ll tender laws are tyrannical and unjust, and calculated to support fraud and oppression.[7]

For a legislator even to propose such a tyranny should be a capital crime [!]:

The laws of a country ought to be the standard of equity, and calculated to impress on the minds of the people the moral as well as the legal obligations of reciprocal justice. But tender laws, of any kind, operate to destroy morality, and to dissolve, by the pretense of law, what ought to be the principle of law to support, reciprocal justice between man and man: and the punishment of a member who should move for such a law ought to be death.[8]

Responding to an anti-BNA petition, which claimed that “the said bank has a direct tendency to banish a great part of the specie from the country, so as to produce a scarcity of money, and to collect into the hands of the stockholders of the said bank, almost the whole of the money which remains amongst us,” [387-8 n] Paine argued that the issue of immediately gold-redeemable banknotes gives a commercial bank like the BNA a strong reason to retain sufficient gold reserves:

Specie may be called the stock in trade of the bank, it is therefore its interest to prevent it from wandering out of the country, and to keep a constant standing supply to be ready for all domestic occasions and demands. … While the bank is the general depository of cash, no great sums can be obtained without getting it from thence, and as it is evidently prejudicial to its interest to advance money to be sent abroad, because in this case the money cannot by circulation return again, the bank, therefore, is interested in preventing what the committee would have it suspected of promoting. It is to prevent the exportation of cash, and to retain it in the country, that the bank has, on several occasions, stopped the discounting notes till the danger had been passed.[9]

Here Paine failed to add that the public’s voluntary substitution of banknotes for specie, although it does not banish any specie that is still wanted, does allow the payment system to conduct a given volume of payments more economically, with less specie. The ability to export the share of specie thus rendered redundant, in exchange for productive machines and material inputs, was a growth-enhancing benefit of banking that Adam Smith had emphasized in The Wealth of Nations published ten years earlier.

In response to the claim that the bank “will collect into the hands of the stockholders” the specie remaining in the country, Paine explained that a bank’s specie reserves are not the net worth owned by its shareholders. Rather the reserves are held to redeem its liabilities, and thus are “the property of every man who holds a bank note, or deposits cash there,” or otherwise has a claim on the bank.

The Bank of North America at the time held the first and as yet only bank charter granted by the legislature of Pennsylvania. Critics damned the BNA as a privileged monopoly. Legislator John Smiley asserted that the charter repeal “secured the natural rights of the people from invasion by monopolies.” This view – later echoed by the Jeffersonians and Jacksonians in their opposition to the First and Second Bank of the United States – is of course paradoxical. The cure for monopoly power created by exclusive charter (incorporation) is to grant charters freely, to go from one to a multiplicity of charters. It is not to go from one to zero charters. If more banks were free to enter but simply hadn’t yet, then the BNA was a monopolist only in the benign sense that the entrepreneur who creates a new market (thus expanding and not restricting trade) is the single seller until others arrive. Eventually additional chartered banks did enter the Pennsylvania market: the (First) Bank of the United States (chartered by the US Congress) in 1791, and the Bank of Pennsylvania (state-chartered) in 1793.

In a later work criticizing the Bank of England (which did have an exclusive charter to issue banknotes as a corporation), Paine unfortunately seemed to blur the distinction between banknotes and irredeemable paper money. He made the valid point that banknotes held, unlike gold held, are not net national wealth (because they are liabilities of the issuer). Then he declared:

the rage that overran America, for paper money or paper currency, has reached to England under another name. There it was called continental money, and here it is called bank notes. But it signifies not what name it bears, if the capital is not equal to the redemption. … The natural effect of increasing and continuing to increase paper currencies is that of banishing the real money. The shadow takes place of the substance till the country is left with only shadows in its hands.[10]

To reconcile this passage with his previous writings, we must suppose that Paine is not criticizing banknotes in general, but the Bank of England in particular for holding inadequate reserves relative to its growing note-issue.

But this raises the question: Why would the BOE want to hold inadequate reserves when the BNA (as he had argued) did not? Paine might have explained this (but unfortunately did not) by Parliament’s implicit guarantee that it would not penalize the BOE for a suspension of payments, giving the Bank a moral-hazard incentive to skimp on reserves. When the Bank of England did suspend payments in 1797, forced by a run on the bank prompted by the threat of an invasion by Napoleon’s troops, Parliament did in fact immunize the Bank against note-holder lawsuits. Paine ten years ahead warned that the BOE might suspend in 1796, which was only one year off if we consider it a prediction:

A stoppage of payment at the bank is not a new thing. Smith in his "Wealth of Nations," book ii. chap. 2, says, that in the year 1696, exchequer bills fell forty, fifty and sixty per cent; bank notes twenty per cent; and the bank stopped payment. That which happened in 1696 may happen again in 1796.[11]

To be clear, Paine anticipated trouble from the growing British public debt, not from threat of invasion. But the two were not unrelated.


[1] Most of the quotations from Paine below come from this monograph as reprinted in Philip S. Foner, ed., The Collected Works of Thomas Paine, vol. 2, which is available online here.

[2] Janet Wilson, “The Bank of North America and Pennsylvania Politics: 1781-1787,” The Pennsylvania Magazine of History and Biography 66 (Jan., 1942), pp. 3- 28; available here.

[3] Letter to the Pennsylvania Packet, April 4, 1786; in Collected Works II, p. 419.

[4] Letter to the Abbe Raynal (1782) in Collected Works II, pp. 229, 230.

[5] Dissertations on Government (1786), in Collected Works II, p. 407.

[6] Ibid.

[7] Ibid., pp. 407, 409.

[8] Ibid., p. 408.

[9] Ibid., pp. 391-2.

[10] Paine, “Prospects on the Rubicon” (1787), Collected Works II, pp. 636-7.

[11] Ibid., pp. 663-4.

  • Mike Sproul

    There is such a thing as a shortage of money, when the amount of money (paper, coins, or whatever) is not enough for people to conveniently conduct their business. When money shortages happen, people will demand "more money", for the very good reason that the lack of money hampers trade. If a bank, or a government, issues more paper money while adequately backing that new money with new assets, then the money shortage can be relieved without causing inflation. Unfortunately, hard money men oppose the issue of new money, because they wrongly think that it will cause inflation, even when it is adequately backed. For example, you immediately call these people "inflationists", because you think "more money"="more inflation".
    Unfortunately, both soft money men and hard money men have a long history of misunderstanding each other. The hard money men misinterpret the demand for more money as a demand for inflation, while the soft money men see the hard money men as oppressors who refuse to allow any relief of a destructive money shortage.

    • tmtisfree

      How is it possible to lack money? Intuitively when something is relatively scarce or lacking, its price increases to inform about the situation, that is the value of one unit of money augments relatively, counteracting the initial shortage (admittedly with some lag): the higher value compensates the lower quantity.
      Even if we assume the reality of a demand of money, banks (not central banks) are the ones in position to rapidly know that the value of money has changed (through changes in money saving, interest rate, etc) and thus should have the ability to create money (by lending more, or de novo) to respond to such demand.

      • Mike Sproul

        The quantity theory would certainly leave one thinking that if, for example, the central bank did an open market sale that reduced the quantity of money by 10%, then the value of the remaining money would rise by about 10%. The backing theory (aka real bills doctrine) says that as the money supply falls 10%, the issuing bank's assets will also fall by 10%, so there will be no change in the value of money. Thus a 10% fall in the money supply could result in a money shortage.
        The next question is why the money supply might fall by 10% in the first place. There are several reasons, ranging from bank runs to credit rationing to government regulations. Economic history is full of people complaining about every last dollar disappearing from circulation, money shortages that were "almost incredible", of the last load of money leaving the colony, etc. Those money shortages are always connected with recessions.

        • M. Camp

          Reading this after I already commented, sorry. You answered my questions, at least for now.

          In re definition of shortage, you were using the classical one it seems, which is a relief.

          Re assumption about free market, I think you were not saying that there could be secular shortage in a free market, but simply that in a non-free market there could. A relief again.

          But I must give thought to this question: if there can be a shortage under backing theory or real bills doctrine (as you've explained) then is this simply a special case of coercive control of prices? In which case, I would understand what you were saying and agree. (And as a bonus, would have learned something from you about backing theory.)

          • Mike Sproul

            The examples of money shortages that I know about mostly come from the American colonial era, so here are two:

            1) Card money in Quebec, 1685. The payroll ship was late arriving to the French colony in Quebec, so the soldiers weren't paid. Coins were scarce to begin with, and this worsened the money shortage. The intendant solved the problem by paying the soldiers with paper IOU's (written on playing cards) that promised redemption in coins once the payroll ship arrived. The recession ended, rather dramatically, and everyone credited the card money.

            This case doesn't quite fit the textbook picture of a shortage caused by a price ceiling. Rather, it was a case of introducing a new, highly efficient form of money in a place where it hadn't existed before. Business was stimulated, just as it would be with any new invention that made trade easier.

            2) Coin shortages in the American colonies, 1690-1750. English coinage was struggling against Gresham's Law. New shilling coins contained about 1/5 oz of silver, but the old worn coins in circulation only had 1/6 oz. Business grew and required more coins, but every time the mint tried to make new coins (with 1/5 oz.), the coins would be hoarded. A coin shortage developed, both in England and America. The colonists responded by printing paper shillings and declaring them acceptable for taxes in lieu of coins. This relieved the money shortage and gave a strong, and obvious, stimulus to business.

            Here again, not quite a textbook shortage caused by a ceiling.

            Here's a link to an online textbook I'm working on. Chapters 29-32 explain the backing theory.

            email me at sproulmike (at yahoo) if the link doesn't work


          • Mike Sproul


            Link got chopped off in the previous post, hopefully works in this one. Otherwise email me.

          • M. Camp

            Re the first example. It seems to be not a counterexample to the supposed theoretical impossibility of long-term, general shortages of money in a free market. It seems to be rather a case of the looking at real-world events closely enough that the falsehoods of the abstract model completely dominate.

            In my mind, these simplifying assumptions, which apply to every economic theory, model, and law, include
            –that economic agents are not human beings with unknowable perceptions, thoughts, and desires but rather continuous input/output devices, that is, mathematical objective data-processing functions of space and time and objective inputs
            –that economic events are continuous, rather than discrete
            –that prices and quantities are continuous, mathematically determined outputs of functions, rather than the result of physical actions controlled by unpredictable, uncontrolled "non-economic" accidents of weather and social behavior and so on.

            It is like concluding that the so-called "prediction" that shortages of commodities can't exist is discredited by the fact that a grocer doesn't post a new infinite price on milk when his cooler fails and all his stock of it is spoiled, or alternatively price in the cost of running a taxi over to his competitor across town and buying milk to restock. It doesn't invalidate the model, it just proves that the model has simplifying assumptions which are false in detail, and that it cannot predict isolated events. It is subject to an uncertainty principle similar to Heisenberg's.

        • M. Camp

          I read up a bit on Real Bills or Backing theory, and I find that I remain confused about how a general, long-term shortage of money could occur, even if most or all bankers were followers of that doctrine.

          I had some trouble with 'doc not found' in your links. What I was able to read lost me, although I have more to read, because the writer was speaking not of general, permanent shortages, but of individual incidents where someone momentarily lacked coins in the purse.

          I would appreciate a walk-through of the case you refer to, where according to the Real Bills doctrine, a shortage occurs.

          But first, I need to know if you are referring to a shortage as what I usually think of it as being: a case where there are bid/ask matches in the market, but no supply, i.e., no transactions take place. In the case of money, the bid/ask "price" is the inverse of the Price Level, if I have my arithmetic right.

          Are you using the same semantics as that? Otherwise, what is a shortage of money, in the context of your statement that they are possible and common?

          • Mike Sproul

            I tried my links to chapters 29-32 on google docs, and they worked for me. Email me (sproulmike at yahoo) if you need me to send you the files directly.
            I don't follow your "bid/ask matches but no supply" question. I've always thought of shortages in the econ 1 sense of a price ceiling that results in quantity demanded exceeding quantity supplied. There are some historical cases where that's what was going on. But other cases where there were widespread complaints of a money shortage don't fit the textbook model.

            A few different cases:
            1) Bank runs cause a sudden drop in the quantity of money, but it doesn't seem to be a shortage caused by a price ceiling on money. Still, people always complain of money shortages when bank runs happen.
            2) Worn coins cause Gresham's law to take hold, where the mint is unable to get new full-weight coins to circulate. That causes a shortage of coins, but it wouldn't explain a shortage of paper money.
            3) Government regulations might forbid the issuance of private paper money, like how the National Banking Acts taxed state bank notes out of existence.
            4) Political paralysis might keep the government from issuing its own paper money, like in the case of the post-civil war greenbacks.
            5) The American colonies would rate a paper shilling at 5 shillings to the ounce of silver. This might undervalue silver, and there would be complaints that all the silver left the colony and business would stagnate. Then one colony or another would raise the rate to 6 shillings to the ounce, and silver would return and business would revive. This one looks more like a regular price ceiling, but it still confuses me.

          • M. Camp

            Here is what I meant about bid/ask prices.

            When there is a ready market to trade X for Y, there are suppliers of Y making bids for X, at some asking price in units of Y, and vice versa. There is a steady flow of transactions, satisfying the wishes of both traders. Bid and ask prices stay close, and periodically one bidder lowers his asking price for X or his bid for X, and the new price level is set, and a transaction takes place.

            I think of a shortage of X as being a case where both parties in the market agree on a rate of exchange (a "price") but there is no supply of X. So people line up to get X early in the morning, and each shipment is immediately sold out in a disorderly market, and most of the buyers of X go home empty-handed, and this condition persists. (A 1970's gas pump with 75 cents on the price dial, and 100 cars lined up to get gas at that price, and the pump is almost always empty.

            Regardless of the cause. ("Price ceiling"as in your definition, or some other cause).

          • M. Camp

            Thanks, I was able to download all 4 chapters.

            I've gotten blocked each time I delve into them, so the question of how a shortage of money can occur seems for the moment to be beyond me, given my still-limited grasp of the fundamental concepts of credit, money, and how they interact even in the simplest possible model* of a market to determine price level and interest rates.

            *My problem is that I'm not able to formulate that mental picture of the simplest possible conceptual model. I suppose I've not ever articulated to myself exactly what that simplest model is, so here goes a first try:
            — a perfectly free market
            — without externalities
            — the market comprises
            — — perfectly rational individuals, each with a set of
            — oo — innovative skills (which create in each individual a unique demand for present capital goods, even if his time preference for consumption goods is identical to another person's) and
            — oo — perfectly well-defined preferences for present and future goods
            — oo — opportunities (goods, production abilities, ownership of factors of production)

            So I lack a starting framework to allow me to read and understand new expositions of various theories of banking and price level. I have nothing to plug new thought experiments–about bakers and butchers and silver IOUs–in to.

            I can easily enough formulate this model, and understand the ABC Theory, for example, if it is presented in terms of a constant money supply, as I have seen done. But what makes a constant money supply, instead of some other, the free market condition–isn't it just an a priori assumption? So naturally I try free money and free banking. So there are no a priori assumptions about money supply. But then money has to be treated as a commodity like every other. When I try to accept this assumption and follow it through to its logical conclusion, it always ends up leaving me baffled. Money ends up seeming "different" somehow, or I have to make assumptions about unpredictable extrinsic changes in money supply, like the Gold Rush, which seem to be arbitrary.

    • M. Camp

      Mike, I do think you are right that there can be a permanent general money shortage, if "shortage" is defined in a certain way, and there is a coercive agent artificially depressing the price of money (in goods and services.

      But I think you need to give your definition of "shortage".

      Using a common economics definition–plenty of bids at current ask price, but no supply–then in a free market there can't be a permanent general shortage of money, can there?

      Sure, you can have a case where many people are unwilling to bid the current ask price, and if you allow that to be considered a "shortage", then there is a permanent general shortage of money.

      But according to that definition, there is also a permanent general shortage of EVERY good. For examples, there are a lot of people who would willingly buy more tuna fish, or a Manhattan penthouse, but there is no supply *at the price they are willing to offer.*

      There can also be a permanent general shortage of money even by the classical definition, if there is a coercive agent setting its price artificially low (i.e., preventing deflation). This latter case may be what you are referring to.

    • lawrencehwhite

      I called the advocates of PA state paper money "inflationists" because historians tell us that these people wanted legal-tender state paper money in order to repay their debts in cheap paper. They welcomed more money in order to get a higher price level.

      • Mike Sproul


        That depends on the historian. For example:

        “Within a year of the passage of the Currency Act of 1764,
        the rapid contraction of wartime paper money issues and a growing shortage of
        specie led New York, Pennsylvania, and South Carolina to instruct their
        colonial agents to lobby for the law’s repeal. Backing the agents were many of
        the same London merchants who, anxious to secure their sterling debts in
        Virginia and North Carolina, had been instrumental in obtaining the Currency Act
        in the first place. Without changing their demand for some kind of adequate
        safeguard for sterling investments, by 1776 they had come around to favoring an
        expansion of lawful currency in a move calculated to boost flagging American
        sales and remittances.” (Joseph Ernst, Money and politics in America, p. 89.)

        “ Economic conditions in Pennsylvania after 1760 closely
        paralleled those in New York. At the end of the was, trade appeared to be in a “melancholy” state. Although some voices had expressed the fear that the wartime currency issues might create an oversupply of bills of credit, cash of any kind was reported as “monstrous scarce.” (Ernst, p. 94)

        I'd say I find historical quotes like the above 10 times more often than I hear of people advocating inflation. It's always "more money!"; hardly ever "higher prices!" I conclude that the advocates of paper money were interested in relieving money shortages, and not in creating inflation.

  • MichaelM

    This discourse leaves out an awful lot of very important context that makes the story seem a lot more political complex than is being presented here. The suggestion that the solution is free chartering/incorporation of new banks makes a little skeptical that you KNOW this context, Dr. White. This is like a suggestion that the solution to a historical complaint of polio is to get vaccinated: It just doesn't work like that when the vaccine is decades away from being invented! Similarly, the idea of incorporation as just another form of competitive business organization was decades away from being invented in the 1780's. The idea of general church incorporation laws was just starting to get off the ground in that era! General business incorporation laws would have to wait several decades into the 19th century.

    In the 1780's, when this was all being written, corporate charters WERE generally used to create privileged, often monopolistic companies who would enjoy a close, usually personal relationship with the chartering government. Nobody had any experience with anything else, anywhere, let alone in the relative economic backwater of central and western Pennsylvania. The expectation of Mr. Smiley that the BoNA charter was an incipient, abusive monopoly was CORRECT. Battles to establish monopoly banks were being waged up and down the sea-board in this time period (New York State politics until about 1820 was determined by almost nothing else), with most states with relevant banking markets banning unincorporated (read: un-chartered) banking entirely by the 1820's.

    Revoking the BoNA's charter was exactly the right thing to do. Its shareholders enjoyed special privileges that could only be gained by a special grant from the legislature. The idea of making those privileges generally available wasn't on the legal-technological radar. Instead, the bank was rechartered, bank chartering in general became a wholly corrupt process in Pennsylvania where political factions battled for control of the legislature in part in order to grant bank charters to their cronies, and unchartered banking was wholly outlawed in 1810. Had the BoNA's charter not been renewed in 1787, perhaps Pennsylvania could have developed a free banking environment similar to the one that existed in Scotland at the time(including branches, something most states didn't get until the 1990s!!!!), instead of the corrupt, all-too-American environment it got instead.

    The BoNA and like institutions in other states represented a direction in the evolution of the American banking system that led through successive policy disasters, culminating in the immense power of the modern Federal Reserve system. To the extent the inflationists were wrong on their economics, they were wrong for the right political reasons.

    I would actually need a lot of convincing that Mr Paine was arguing for anything like actual free banking. I would need an almost impossible amount of convincing that the recharter of the BoNA was a good move for free banking. I would need an actually impossible amount of convincing that its initial repeal wasn't a politically good move for the citizens of the state of Pennsylvania.

    Know your damned context.

    • lawrencehwhite

      Thanks for your addition of some historical context (though your seemingly angry tone is puzzling). Be assured that I am aware of the context, and have written about it in several other places (in pieces on the history of free banking, and on the Jacksonian-era advocate of free banking and general incorporation William Leggett). I chose not to write here about the history of the move in the US from individual bank chartering to general bank incorporation (the “free banking” laws beginning 1837) and then to general business incorporation because it seemed like a distraction from my focus on Paine’s writings on banking.

      I didn’t argue (contrary to your polio vaccine analogy) that the legislature of Pennsylvania could plausibly have passed a “free banking” statute of the 1830s sort in 1785. Nor did I credit Paine with advocating free banking. I suggested that if the PA legislature had been sincerely worried about the BNA having a monopoly that restricted the provision of banking services, they could have chartered more banks. Which as I noted they did a few years later, once an applicant appeared, the Bank of Pennsylvania in 1793. Their choice was not only between zero charters, one charter, and (anachronistic) general incorporation.

      It is true that legislatures at the time often granted bank charters that were geographical exclusive, i.e. used them to create monopoly privileges, and reinforced them with restraining laws against unincorporated banks. But your statement that at the time “[n]obody had any experience with anything else, anywhere” is an exaggeration. As I’m sure you know, Scotland had had three chartered banks since the 1740s, and dozens of unincorporated banks. The Scottish system was known in America through Adam Smith’s discussion of it in Wealth of Nations (1776), a book we know that Jefferson and Hamilton read.

      • MichaelM

        So I posted something of an apology and a continuation of the argument a few days ago, but it seems to have been eaten by the internet aether. I don't have the time right now to go through with the restatement of the argumentation, so I'll just apologize for the tone of my previous post. Early American history, especially related to money and banking, is something of a sore point for me because, when it isn't being ignored entirely, it's being re-imagined for modern political viewpoints. To me, for example, the Hamilton play is an unmitigated disaster for the chattering class' understanding of the time period. I get a little heated pretty easily when I see people getting things incorrect, or at least incorrect according to my understanding.

        I'll repost the informational aspect sometime, or send it to you somehow if you'd like, but for now, I'm sorry for being a bit of an ass.

  • S.M. MacLean

    Excellent! I plan to write a post on Paine and hard currency . . .

  • Benjamin Colr

    I enjoyed the Alt – M articles.

    Yet there seems to be a premise throughout Alt-M writing that fiat-money central banks will always be too loose.

    As we have seen for the last 30 years, interest rates and inflation have been falling in developed nations, and we now see deflation in Japan and Europe and we are one recession away from deflation in the US.

    The central banks appear unwilling to pursue a course to even generate moderate inflation.

    What would be the political-economic motivation to run tight-money central-bank policy and to bring prices to deflation or no inflation?

    • George Selgin

      Benjamin, I'm surprised by your statement. I could direct you to a slew of articles I've posted on Alt-M concerning the excessively tight Fed stance in 2008 (and for some time after), and also on other episodes of "bad" deflation. In many places I and others have also upheld the ideal of a monetary system that maintains a stable flow of spending. In that and other ways we've gone out of our way to distinguish ourselves from certain hard-money types who imagine that money can never be in short supply, or that central banks only screw-up in one direction.

      Having said that, though, it must also be said that, taking the long view of history, and allowing for the usual proclivities of governments to try and spend their way out of trouble, excessive money creation, whether through debasement or printing of paper notes or creation of excess central bank reserve balances has been a far more common than deflation throughout the history of government control of money. Available historical price indeces speak very clearly on the point. I hope that our writings here reflect that reality reasonably accurately, rather than reflecting any one-sidedness in our thinking.

      • Benjamin Cole

        George Selgin:

        Excellent comments, and I stand corrected regarding your incisive articles (from which I have learned much).

        I do not wish to mention names, but there are many articles to this day on Alt-M that still appear cemented into the premise that the Fed has been loose, is dangerously loose, and plans to be loose until a monetary holocaust is incurred.

        Only recently there was an Alt-m article that posited the Fed as a statist-inflationary organization, no longer serving kingly warlords but modern-state welfare-lords.

        It is a point of view 30 years out of date.

        Indeed, an interesting question is what politico-economic groups favor the chronically tight money that has defined the Fed since the mid-1980s? Why does the BIS ever call for even tighter money?

        Should we not consider fiat-money central banks to be statist-deflationary organizations? That has been the track record for the past few decades.

        I suppose in the case of the ECB, we could call it a "supra-national deflationist organization."

        Anyway, I look forward to more writing by George Selgin.

        • George Selgin

          RE: "the chronically tight money that has defined the Fed since the mid-1980s." I don't think this at all correct. The late 80s, much pf the 90s, and (most notoriously) the mid 2000s, were periods of relatively easy money, taking NGDP growth as one's measure of the stance of policy. In all these periods, NGDP growth consistently exceeded 4%, often by 2 percentage points or more. The growth rate has on the other hand only rarely fallen below 4% during the entire post-WWII period. The inflation numbers reflect this. So, unless one wants to regard NGDP growth of well above 4%, and an average inflation rate of well above 2%, as "normal" or ideal, the view that the Fed has generally been biased toward excessively easy money can't be rejected. Nor does recent experience necessarily suggest a change: the relatively tight money stance since 2008 has, if Fed official's pronouncements are to be believed, been unintentional, reflecting not the Fed's desired stance but it's inability to achieve its targets.

  • Ihor Mocherniak

    They recognized that real silver had a particular melodious ring once bounced on a tough surface, like the blade of a handy steel, a bronze aegis, or Associate in Nursing ornate marble floor. Sound cash carried the 'ring of truth,' whereas debased coinage landed with a boring, unsatisfying thud.

    The debasement of Rome's silver currency unmasked the deceit of a bankrupt empire, that finished with the autumn of Rome, a pattern perennial over and over. Sound money's “ring of truth” had found its place within the history of cash and of countries.

    As the us grew westward to the sea-coast and north to Alaska, gold, silver and copper coins of all nations were tender within the young us till the decade, and were in use even long at that time. Americans with no formal education in reading, writing and arithmetic relied on the sight, sound, and feel of the sole cash they knew. Learning the various musical ringing sounds of these coins might simply qualify even a grassland settler contemporary off the procession as Associate in Nursing social scientist.

    In the previous West of the vary roving yankee cowboy, the ring from that silver dollar tossed on the bar of polished oak told the owner he was gushing hard liquor for sound cash, and not for a counterfeit forgery.