A STATED Meeting of the Society was held, at the invitation of Mr. Hermann F. Clarke, at the Club of Odd Volumes, No. 77 Mount Vernon Street, Boston, on Thursday, February 24, 1938, at three o’clock in the afternoon, Vice-President Matt Bushnell Jones in the chair.
The records of the last Stated Meeting were read and approved.
In the absence of the Corresponding Secretary, the Recording Secretary reported the death on January 18, 1938, of Francis Russell Hart, a Resident Member.
Mr. Curtis P. Nettels read the following paper:
A REVIEW of the careers of the outstanding American merchants during the 1780’s shows that for every one of their number who opposed the Constitution there were eighteen who supported it.16 Unfortunately, not many of the merchants have left systematic statements of their positions on the economic issues which faced the country in that decade. That group as a whole were not given to theorizing.17 They seem to have been in general agreement as to the economic benefits which they expected from a stronger central government; the task before them was that of creating the political forms which would realize their economic objectives. For this reason, political problems overshadowed economic issues in the debates of the decade, thus giving the impression that economic factors were of secondary importance—a conclusion that does not necessarily follow.
Pelatiah Webster, the Philadelphia merchant, did, however, write systematically of currency, credit, and taxation as parts of the federal problem between 1776 and 1790.18 From fragmentary evidence pertaining to the merchants as a whole one may conclude that Webster’s views in large measure represented their theories and their program. Two other considerations support such a view. Webster’s ideas with respect to taxation and finance were very similar to those incorporated in the Constitution. Furthermore, one can scarcely imagine that a large majority of the merchants would have supported the Constitution had they been hostile toward its economic features.
In order to appreciate the importance of Webster’s economic theory one must keep in mind the familiar clauses of the Constitution with reference to money and credit. It will be recalled that the Constitution conferred upon Congress the exclusive right to coin money and to regulate its value. At the same time it deprived the states of the power to issue bills of credit and did not expressly confer such a right upon the federal government, although the right might be inferred for the latter from the power of Congress to make effective the delegated power of borrowing money.19 The states were forbidden to make anything but gold and silver coin legal tender in payment of debts, nor could they enact any laws impairing the obligation of contracts.20 Thus the Constitution denied the state governments control over money, credit, and debt modification except in so far as a state could charter private banks. If a state did charter a bank, the issuance of paper currency (bank notes) was placed in the hands of private persons, subject to the rule that such notes could not be made legal tender—a protection to creditors against the abuse of the privilege. The inferred power of Congress to issue bills of credit might have been used to establish a public scheme of credit control; on the other hand, the power of Congress to charter a national bank could also be inferred, in which case control over credit might be lodged in the hands of the private citizens who composed the bank. In short, with reference to the creating and the supplying of credit the Constitution forbade the states, as such, to act; it did not specifically authorize Congress to act; it permitted the states to charter private banks; and, by inference, it permitted Congress to charter such a private bank. The power of Congress to tax and the constitutional duty imposed upon it of paying the national debt also had a very important bearing upon the monetary and credit structure as appears clearly in the writings of Pelatiah Webster.
In 1776 Webster began his discussion of finance in “An Essay on the Danger of Too Much Circulating Cash.” This was followed by his seven elaborate essays on free trade and finance, published between July, 1779, and January, 1785. In December, 1780, appeared his strictures on a Pennsylvania Legal Tender Act, followed in January, 1781, by his plan for a national superintendency of finance. In 1783 came his memorable dissertation on the need of a stronger federal government. Three years later, in February, 1786, he published his very important essay on credit. In 1787 he wrote in defense of the Constitution; and in 1790 he concluded the series with a plea in behalf of the public creditors.21 In these and other papers he expounded the monetary, business, and legal theories that have been asserted ever since by the Federalist-Whig-conservative-Republican element in American society.
Webster’s primary interest was focused upon the currency problem. Everyone knows, he wrote in 1783, “what a spring, what vigor” money
gives to every kind of business in the country, whether of husbandry, mechanic arts or trade. There is no comparison between the advantages of carrying on any sort of business in a country where cask circulates freely, and in a country where cash is scarce. In the one case, every kind of business will flourish, and industry has every sort of encouragement and motive for exertion; in the other all business must be sadly embarrassed, and of course make but a feeble and slow progress.22
But the currency must also have a stable value. Money, he wrote in 1779, “becomes a sort of common measure of the value of all articles of trade; and therefore I should conceive it would be as dangerous to adopt any measures which would alter its value and render it fluctuating, as to alter the standard weights and measures. . . .”23 A depreciating currency is “a dangerous article to keep on hand: it is like perishable goods, which are lost in the keeping.”24 Again: “Money in a state is like salt in cookery; some of it is very necessary, but too much of it spoils every dish, and renders the whole dinner unsavory to the taste, and hurtful to the health.”25
In all his essays Webster assumed that a single, uniform paper currency of national circulation was indispensable. It would eliminate all the exchange difficulties that attended thirteen separate state currencies, each of different value. A stable paper currency would even have advantages over metallic money in that “it is sooner counted, and more easily conveyed.”26 But paper currency issued by the general government was not in effect money; Webster believed instead that such paper was only an instrument of credit—a promise of the government to pay the holders of its bills a stated sum in actual money. Since such paper “has no real fixed value in itself, it is necessary that it should be connected, tied, or fastened firmly to something that is fixed. . . . Such a fixed medium is hard money, the value of which cannot vary much from its value in Europe, and therefore its permanency may be safely depended on.”27 “And I think farther, it is very manifest that we must have a promiscuous circulation of both hard money and paper, in order to keep the exchange of them equal.”28
If paper currency lacked intrinsic worth, what conditions were necessary in order to establish and maintain its value? The idea is implicit in all Webster’s writings that such value depended upon the quantity of the paper in circulation and the supply of commodities available for trade.29 Should the quantity and circulation of money increase without a corresponding increase in the supply of goods, the currency would depreciate; if the supply of money were increased while the supply of goods was decreased, depreciation would be doubly rapid.30
Of the effects of depreciation Webster noted, first, that it acted as a a tax—and not uniformly on all the people, but with particular severity upon the possessors of money and upon all who had investments in mortgages, bonds, and book-debts. If the supply of money were doubled, he argued, the value of the dollar would be cut in two, thus effecting a capital levy of 50 per cent on the moneyed and investing classes.31 Depreciation appeared monstrous to him because it “brings the burden beyond due proportion, on the most virtuous and useful of our people, such as by prudence and economy have made money and got a good command of cash . . . and at the same time operates in favor of the most worthless men amongst us, the dissipating, slack, lazy and dilatory sort, who commonly keep themselves in debt, and live on the fortunes of others.”32
So also depreciation affected the relationship between the buyer (or merchant) and the seller of produce (or farmer). According to statistics cited by Webster, the price of country produce rose more rapidly during the Revolutionary War than did the price of imported goods.33 The abundance of currency in circulation enlarged the supply of cash in the hands of the sellers inasmuch as their payments on account of taxes, interest, and purchases of imports did not increase in proportion to the increased supply of money they obtained through high prices for produce. Consequently, the sellers of produce, not hard pressed for money for taxes and interest, could hold back their produce until they could get high prices.34
On the other hand, the merchant who had to pay such high prices did not benefit. Unlike the farmer (who might keep his produce on hand without extra storage costs or grave risk of the deterioration of products), the merchant could not afford to hoard the produce he purchased, for if he did so it became a dead weight on his hands. “Goods which cannot be sold, are as useless in the hands of the merchant, as money which cannot be circulated.”35 The merchant’s necessity of selling goods therefore quickly tended to keep down his price. “Let a man who is under necessity of selling an article, apply to one to purchase, who is under no necessity of buying, he must take what is offered.”36 And when the merchant received payment in a depreciating currency, he dared not keep that on hand lest it waste away “in the desk.” Nor did he dare invest it in mortgages that might be destroyed by depreciation. Hence he had to put his money quickly into goods. This made money active and kept up the price of everything he bought. Currency depreciation thus compelled the merchant to buy at high prices and to sell quickly without being able to add both the increased price and the customary charge for profit. His nominal profits increased, but his real profits decreased.37
Considering Webster’s attitude toward currency depreciation, one can understand why he devoted much thought to the means of avoiding it. First of all, he condemned efforts to maintain currency values by means of price-fixing and legal tender acts. Assuming that, without legal restraints, buyers and sellers would compete freely, he argued that when all persons were seeking profit in trade, they would buy and sell as much as possible, thus bringing a maximum quantity of goods of the best quality to the market. If a scarcity occurred, the rise in prices stimulated producers and traders to supply the scarce article, thereby converting scarcity into plenty. Should a scarcity persist, then high prices preserved the existing stock against waste, thus tending to ward off “high distress and want” till larger supplies arrived. When, however, sellers were ordered to part with their goods at unduly low prices in paper currency, they would either take high prices secretly or hoard their goods. Hoarding aggravated the scarcity, retarded production, and forced a resort to barter which lessened the demand for and the circulation of the currency. Such a result depreciated further the value of the currency and threatened to destroy it altogether—just the opposite effect intended by the price-fixers.38
To legal tender paper currency Webster objected, not only because it defrauded creditors by compelling them to receive a lesser value than they had given, but also because it retarded future investments. “Who can lend money with any security,” he asked, “and of course who can borrow, let his necessity and distress be ever so great? who can purchase on credit, or make any contract for future payment? in very deed all confidence of our fellow-citizens in one another is hereby destroyed, as well as all faith of individuals in the public credit.”39 In line with this attitude Webster argued strongly against making the Continental currency legal tender, and when depreciation was acute in 1780, he urged that all past debts be paid in a specie value equivalent to that of the original loan.40 Replying in 1787 to the criticism that the Constitution contained no Bill of Rights, he said: “The Constitution contains a declaration of many rights, and very important ones, e.g. that people shall be obliged to fulfill their contracts, and not avoid them by tenders of any thing less than the value stipulated.”41
In the years before 1781, when Webster assumed that the Continental bills of credit would continue to form the national currency, he was intent upon finding some means of keeping their quantity fixed and their value stable. Such a purpose naturally required a method of war finance other than that of a continual increase in the supply of paper currency. One method which he rejected was that of long-term borrowings in Europe for war expenditure. He estimated that, due to the low credit of the United States and to prevailing rates of foreign exchange, the government would receive only eighty dollars in specie for every hundred dollars of debt it incurred, and he also objected to paying the yearly 5 per cent interest charge to foreigners.42 Furthermore, borrowing abroad increased the supply of money at home, thus inducing the very depreciation he sought to avoid.43 In addition, he believed that it was “as necessary that we preserve ourselves independent of France, Spain, and Holland as of England.” The nation, he wrote, which “is in debt to a superior power, cannot be free and independent, but is ever liable to demands the most insulting and inconsistent with freedom and safety.”44 Finally, if money must be raised on loan, let it be borrowed at home. “If interest of hard money . . . must be paid, I think it better that our own people should have it than strangers, that the yearly profits of the loan should lie among ourselves, and not go out of the country, never to return.”45
During the war Webster urged taxation as the best means of preventing new issues of paper money and thus of keeping its quantity and value fixed. If new issues were not made, the bills already in circulation would soon reach a natural exchange level with specie, and this exchange rate should be legalized for all payments.46 Thus if paper should adjust itself to specie at the rate of 20 to 1, an obligation of one dollar in specie could be met with twenty paper dollars.47 He offered various arguments in favor of this plan. A tax (whether poll, property, excise, or impost) would, he said, bear upon all the people, whereas a depreciating currency penalized one class—the investors and the possessors of money.48 Furthermore, if the sellers of produce (or farmers) were obliged to pay each year a large tax with paper money, they would not possess a surplus of cash. Needing money for taxes, they would not be able to withhold their produce from the market; they would have to sell in order to get tax money, and sell at prices not detrimental to buyers.49
The need of taxation as a means of stopping the increase of paper currency first prompted Webster to demand a stronger central government. In March, 1780, he wrote:
No plan of taxation, or any thing else, can be of any good effect, if there is not some method adopted to bring all the States into an union and punctuality of execution. The least company of men, who have a common concern . . . find it absolutely and essentially necessary to have some way to compel their partners into a punctual discharge of their quotas. . . . If one State hangs back, another will, and the best concerted plan possible may be rendered ineffectual by delays and defects in the execution.
It is essential to the very being of any independent community, that it has in it all the powers necessary for its own preservation. These powers doubtless exist in the Thirteen States. . . . And . . . I suppose they must be vested in the Congress. . . . But if it is thought that these powers are not sufficiently explicit and declared . . . it is necessary that this declaration should be made without delay. . . .50
As to a federal tax program, Webster favored levies on imported goods (excepting raw materials) and internal taxes to be apportioned among the states according to “the number of living souls or human persons of whatever age, sex or condition. . . .”51
The disappearance of the Continental currency and the cessation of war expenditures did not solve the problem of currency and taxation. There remained the task of paying the public debt, a subject which engaged Webster’s thought during the 1780’s. In this connection he insisted that the debt should be paid in full, but not by means of foreign loans or government issues of paper currency. “A total discharge of the principal at once, if sufficient money could be obtained, would make such a sudden, so vast an addition to our circulating cash, as would depreciate it, and reduce the value of the debt paid, much below its worth at the time of contract, and introduce a fluctuation of our markets, and other fatal evils of a depreciated currency. . . .”52 The debt must, therefore, be paid, argued Webster, out of tax revenues. But since the debt in 1783 amounted to $40,000,000, he admitted that the principal could not be at once paid from taxes; hence he favored a funding scheme that would not at the outset reduce the principal, but would merely provide a yearly interest to the public creditors. “It would . . . be much better,” he wrote, “for the creditor to receive a certain, well-funded security of his debt than full payment: for in that case, if he needed cash for his debt, he might sell his security at little or no discount, which is the constant practice of the public creditors in England, where every kind of public security has its rate of exchange settled every day, and may be negotiated in a very short time.”53
Since Webster estimated the interest charge against the government for servicing the debt at $2,000,000 a year, he had to consider carefully the kind of tax to be levied.54 He decided in favor of import duties and spoke eloquently of an impost on luxuries which would touch the pockets of the rich.55 Such an impost must be a national tax that “would in no case be subject to their [the states’] repeals or modifications,” thus guaranteeing that “the public credit would never be dependent on, or liable to bankruptcy by the humours of any particular Assembly.”56 In the Dissertation of 1783 he even proposed, as a constitutional provision, that “such acts [of Congress] as create funds for the public credit . . . shall never be repealed till their end is effected, or other funds equally effectual are substituted in their places. . . .”57
Webster further proposed that Congress should redeem the outstanding certificates in specie at their face value. He also favored paying the full face value in specie only to the original holders of such securities.58 If the certificates had changed hands, the original lender should receive the full value, less what he had received when he had sold them. Speculators who had purchased the certificates should not receive more than they had paid to procure them.59
After 1783 Webster turned against issues of paper currency by Congress as the means of supplying the country’s monetary needs. He denounced state issues even more emphatically. He now favored the policy of private control of credit through the agency of a single private bank of national scope. Such a bank should be owned and controlled by the merchant-capitalists on the assumption that public bodies did not have sufficient knowledge of finance properly to regulate the currency. He estimated that the supply of paper currency in the states could be two or three times more than the supply of coin without running the danger of depreciation. A paper currency totaling $10,000,000 (specie value) was all the country needed. The bank should issue notes redeemable in coin, but if such notes were used as tax money, and if the government employed the bank as its fiscal agent, people would not ordinarily demand coin for notes, and the bank might even expand credit further through loans to its clients, who would receive money as a deposit and withdraw it by check.60 “The force and energy of credit,” he declared, “perfectly well established and permanent, is vast almost beyond conception; it is found by experience to supply the place of cash, and much better than cash, in almost all transactions, except in small expenses, where small change is necessary, such as travelling expenses, market-money, &c.”61
Of the advantages of a bank Webster had much to say. “The bank gains all the lost paper, i.e. all such bank-bills as are lost (where the loss cannot be proved) and, of course, can never be brought to the bank for redemption or payment.”62 Such an institution would also expose debased or depreciated currency, thus protecting its clients who might otherwise accept such currency at a loss.63 In addition, the bank would give men of wealth great political influence. “Our bank is a sort of mercantile institution, and the influence of merchants is the safest of any that can affect a government.”64 Furthermore, bank stock offered an ideal form of long-term investment. “It affords a much better security than can be found in the hands of any private man, and the half-yearly dividends are more than equal to any profit that can be derived from them when put to interest on mortgage, and the punctuality of payment better secured, and the trouble of collection much less.”65
Webster assumed that a national bank should be a monopoly. He told with approval an episode in connection with the Bank of North America. A group of investors, jealous of the profits made by that bank, threatened to organize a competing institution. But the directors, convinced that competition would be destructive, persuaded their rivals to join the bank, “so that the difficulty was got over.”66
The occasion for Webster’s memorable essay on credit (February 10, 1786) was an attack on the Bank of North America made by the paper money party of Pennsylvania, then in control of the state legislature. Webster noted that, although Congress had chartered the bank on December 31, 1781, investors had hesitated to put money in an institution which had only the dubious authority of Congress behind it. Consequently, the promoters had secured a charter from the state of Pennsylvania on April 1, 1782. Realizing that state bills of credit were inconsistent with the Bank of North America, the paper money party succeeded (September 13, 1785) in having the legislature repeal the act which granted the Pennsylvania charter.67 In closing his essay on credit, Webster presented a remarkable defense of the bank on constitutional grounds. He justified it as a federal institution by a broad construction of the powers of Congress under the Articles of Confederation. As to the state charter, he insisted that it had created a vested property right which the constitution of Pennsylvania protected. The charter as a contract could be annulled only by mutual consent of the two parties or by proof in a court of law that the contractors had violated their trust. Thus in 1786 Webster expounded the doctrines of vested property rights, of the sanctity of contracts, of the supremacy of the Constitution over the legislature, of judicial review of state legislation, and of due process of law.68
It is evident that the fundamental ideas of Pelatiah Webster pertaining to currency, credit, taxation, and the public debt were also those of his fellow merchants of the 1780’s. It is likewise evident that most of these ideas found lodgment in the Constitution. By restraining the states from issuing bills of credit the Constitution opened the way to the issuance by banks, whether chartered by the states or by Congress, of currency that was not legal tender. It is true that the powers of Congress might have been construed so as to authorize the issuance of a national, public paper currency as well as to justify the establishment of a private national bank. That Congress chartered such a bank in 1791 and that Congress did not authorize the issue of legal tender bills of credit until the Civil War suggests again the early influence of the merchant class.
Mr. Joseph H. Beale read a paper entitled “A Lawyer’s View of the Mayflower Compact.”