SUMMARY
99
to existing capital was the result. To this was opposed the quan-
tity theory, and among our own colonial writers appeared a num-
ber of sound thinkers, like Douglass, who urged that an increase
in the quantity of units of currency but depreciates each unit, so
that the enlarged circulation does no more work, and does it no
more effectively than the smaller supply that previously obtained.
The appearance of the modern type of bank note, issued in excess
of reserves and yet convertible into specie on demand, gave the
earlier view renewed popularity; but after 1825 the naive doc-
trine, to which even Hamilton had fallen victim, that bank-note
inflation signifies added capital, was quite thoroughly discoun-
tenanced.
Adam Smith, reasoning on the assumption that a given quan-
lity of media of payment is necessary to effect the exchanges of
each country, had held that bank notes do augment the nation’s
capital, in the sense that they displace a like amount of the pre-
cious metals from circulation, all of which, save what must be
kept as reserves against the notes, is exported in exchange for
other forms of wealth, chiefly productive capital. That banks
secure this advantage, became, with some qualifications, quite
generally accepted at about the time that the cruder doctrine
confusing inflation and the creation of capital began to be aban-
doned. Even this more moderate view was rejected, however, by
a relatively small group who insisted that the community export-
ing specie receives no compensation, thus recurring to something
like the earlier simple opinion that the use of bank notes is harm-
ful in that it causes the expulsion of gold and silver. Smith’s
thesis was opposed also by those who asserted that bank notes
are even more costly than metallic money, since many large
establishments are needed to issue them. In its least tenable
form this objection emphasized the cost in the form of interest
paid for the loans through which the notes are put into circula-
tion. It was frequently complained, furthermore, that this cost
is increased by the fact that banks make loans in excess of the
amount of money they actually possess, thus imposing a larger
interest charge upon the community, while depreciation of the
