30 BANKING THEORIES IN UNITED STATES

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doctrine that banks can increase the country’s currency gained
renewed vogue. Pelatiah Webster, sound as his views were in
general, urged that one of the gains to be derived from banks is
that they can issue notes, upon the basis of a partial reserve,
which circulate as the equivalent of metallic money. In this way,
“a good bank may increase the circulating medium of a State to
double or treble the quantity of real cash, without increasing the
real money, or incurring the least danger of a depreciation.” *
Hamilton wrote in similar vein, and his Report on a National
Bank (1790) unquestionably exerted a mischievous influence upon
the literature and practices of the succeeding decades. The establishment
 of a bank, he asserted, results in the ‘augmentation
of the active or productive capital of a country. Gold and silver,
where they are employed merely as the instrument 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.” Money kept in a chest pending
 investment produces nothing meanwhile. But, deposited in
a bank, it yields a profit to someone, and, when the opportunity
for investment arises, can be withdrawn for use by the owner.”
Thus far, Hamilton seems to have had in mind the gathering
together of idle surpluses of monetary capital, resulting in a more
effective utilization, rather than an actual creation, of capital.
It is not unlikely that he had been influenced by a reading of
Smith. But his further elaboration of the point is more dubious.
“Tt is a well-established fact,” he states, suggesting, perhaps,
the influence of the passage that we have just quoted from Webster’s
 essay, “that banks in good credit can circulate a far greater
sum than the actual quantity of their capital in gold and silver.
The additional employment given to money [through the deposit
of spare cash in banks], and the faculty of a bank to lend and

1 Pelatiah Webster, Essay on Credit (1786), in Political Essays, p- 436. The
essay was a contribution to the controversy over the repeal by Pennsylvania of the
charter of the Bank of North America.
2 Hamilton, Report on a National Bank (December 13, 1790), American Stale
Pavers. Finance, 1, 67, 68.