BANKS CAUSE PRICE FLUCTUATIONS 59

In his Report on a National Bank, Hamilton urged that

among other material differences between a paper currency issued by the
mere authority of government, and one issued by a bank, payable in coin, is
this: that in the first case, there is no standard to which an appeal can be
made, as to the quantity which will only satisfy, or which will surcharge the
circulation; in the last, that standard results from the demand. If more be
issued than is necessary, it will return upon the bank.
The issues of a bank “must always be in a compound ratio to the
fund [reserves] and the demand: — Whence it is evident, that
there is a limitation in the nature of the thing.” Government
paper, on the contrary, is limited in quantity only by the government’s
 discretion.!
This is not, of course, a complete adoption of Smith’s doctrine,
with which Hamilton was no doubt familiar. He could not, indeed,
 have adopted it, because of his opinion that banks increase
the quantity of media of payment — the very principle that
Smith was seeking to refute, and upon the denial of which Smith’s
own reasoning rested. But, while Hamilton thought that convertibility
 does not prevent the increase of the volume of the
currency, he held that it does preclude any danger of an excessive
increase — a position that becomes more intelligible when we
recall Hamilton’s acceptance of the favorite notion of colonial
days, that banks may be used to remedy an inadequacy of media
of payment.
The doctrine that bank notes cannot alter the total quantity
of media of payment because of their convertibility seems to
have received scarcely any attention before the second quarter
of the century. A Congressional committee did declare in 1816
that it would be superfluous to “intrude upon the House a disquisition
 on a proposition so plain as to be at present almost
received as an axiom, — that an excessive issue of notes will
furnish its own check, if banks redeem with punctuality the notes
they send into circulation.” ®> But the literature of the period
! Hamilton, Report on a National Bank (1790), American State Papers, Finance,
3 Te
p Report of Committee on Unchartered Banking in the District of Columbia
(March 23, 1816), United States House of Representatives, 28th Congress, First
Session, Executive Document, No. 15, p. 683.