104 BANKING THEORIES IN UNITED STATES
the banks for specie to be shipped abroad, the banks are forced
to call their loans, contracting the currency and precipitating a
fall in prices. But the different members of society had entered
into obligations proportionate to the amount of circulating medium
in the days of banking prosperity. The quantity of circulating
medium is diminished, and they have not the means of
discharging their debts.” Inability to sell their goods at the
prices at which they have purchased them on credit leads to
bankruptcy; the mutual dependence of merchants upon the
solvency of each other causes the financial embarrassments to
propagate. Finally, the reduction in the volume of bank currency
reduces prices; this checks imports and stimulates exports, causing
a reflux of specie into the country. The banks get renewed
confidence, expand their loans, and the cycle repeats itself.”
“If our circulation was gold and silver,” another critic of banking
believed, “it would be impossible to create those ruinous
fluctuations in prices that cover the land with misery and desolation,
every once in five or ten years. The moment a spirit of
speculation can be excited, the banks increase the flame by pouring
oil upon it; the instant a reaction takes place, they add to the
distress a thousand fold.” ®
“The evil from which we now suffer,” wrote George Dutton in
1857, “is simply a derangement of the currency.” The material
wealth of the country remains undamaged. Prices depend upon
the magnitude of trade in relation to the volume of currency
times its velocity of circulation (x = zy was his formula). The
use of bank notes subjects the quantity of media of payment to
the whims of corporations, upsetting the stability of the price
formula and producing fluctuations in the state of business.*
A. P. Peabody, editor of the North American Review and later
professor in Harvard College, regarded the panic of 1857 as but
the typical climax to the sequence of bank inflation, rising prices,
1 Gouge, Short History of Paper Money and Banking in the United States (1833),
. 25.
° is op. cit., pp. 235, 26.
3 Theophilus Fisk, Banking Bubble Burst (1837), p. 25.
4 Dutton. The Present Crisis (1857), pp. 4-16.
