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Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
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Chapter 10
The Banking and Credit Systems, II


(Reprinted from Hunt's Merchants' Magazine and Commercial Review, XXXIX (Oct., 1858), 443-50.)

To the Editors of the Merchants' Magazine:—

On further investigation, I found, after sending off the manuscript of the article contributed by me to your September issue under the above caption, that I was in error regarding the time and circumstance of the commencement of the prevailing currency system—the organization of debt into currency through the medium of a bank. I had depended upon the authorities of Adam Smith and McCulloch, that happened to be before me at the time, both of which state that the stock of the Bank of England was increased only £3,400,000 to purchase the South Sea annuities, amounting to £4,000,000. They say nothing of the premium paid on that subscription.

In Francis' "History of the Bank of England" I find the following account of this transaction:—"In 1722, the South Sea Company were allowed to sell £200,000 government annuities, and the Bank of England took the whole, at twenty years' purchase, at a price equal to par. To meet the payment, amounting to £4,000,000, their corporate capital was increased £3,400,000 by £3,389,830 10s. being subscribed for at 118 per cent. By this transaction the bank made a profit of £610,169 10s., and the capital amounted to £8,959,995 14s. 6d." Thus was formed the reserved fund, "which, under the name of REST, has increased with the business of the house, and has frequently proved of invaluable service."

This is a perfectly clear explanation of what appeared to be a deficiency of subscription for the purchase of the South Sea stock. We find it to be the commencement of the celebrated "rest," designed, as it has proved, to be a security for an unfailing dividend to the stockholders of the bank. Pursuing the investigation, I find the bank plunged into the debt-currency system, loaning its debt without capital in hand, as deeply as possible, at the very beginning of its existence. Its early operations are described by its friends so plausibly, and with so much sophistry and word twisting, that, as there are no publications of its opponents to be found, the casual reader would never suspect that this famous bank went into operation with almost no capital at all, and so continued for several years; but such is the fact. It was at first an engine, ingeniously adapted to operate with the loyalty and religious enthusiasm of the English people in favor of the Protestant succession of William and Mary; to carry on the war against Catholic France, in the endeavor of Louis XIV to restore the exiled Stuart, James II, to the British throne. Its efficient aid in securing the successful result of the siege of Namur, in 1695, was universally acknowledged, and thereby it gained great popularity. Its first deputy Governor, Michael Godfrey, was killed in the trenches before that place by a cannon ball, in the presence of the king, after having conducted a remittance of specie to the camp. But it was by the sophistical application of the terms "capital" and "money" that people were induced and deluded to accept its notes and credits, which were nothing but debt in a form more convenient than the tallies of the exchequer, for which they were exchanged.

Before the establishment of the bank, "tallies," according to a writer of that day, "lay bundled up like Bath faggots in the hands of brokers and stock jobbers." And they were faggots, neither more nor less. These tallies were sticks, with the indebtedness of the government scored upon them in notches; the stick, or faggot, was then split lengthwise through the notches—one half given to the creditor, and the other retained in the exchequer. When payment was demanded, it became necessary to match the two halves into a perfect whole again, as the voucher of the claim. This form of obligation, however inconvenient in other respects, must have been very secure against counterfeiting. I can conceive of nothing more difficult than to match one-half of a faggot, thus torn in two, with any other than the original piece.

The oldest account of the bank, I think, is the following, taken from a rare pamphlet, published in 1695 by Michael Godfrey, who was killed the same year in the trenches before Namur, as before stated:—

The bank is a society consisting of about 1,300 persons, who, having subscribed £1,200,000, pursuant to an act of Parliament, are incorporated by the name of the "Governor and Company of the Bank of England," and have a fund of £100,000 per annum granted them, redeemable after eleven years, upon one year's notice; which £1,200,000 they have paid into the exchequer by such payments as the public occasion required, and most of it long before the money could have been demanded. . . . There was a proviso in the act, that if £600,000 or more of the said £1,200,000 should not be subscribed on or before the 1st August then next coming, that the power of making a corporation should then cease, and the money be paid into the exchequer by the respective subscribers and contributors.

The subscription, however, was taken up in ten days' time.

Noticing the objections to the bank, the same authority proceeds:—

Some find fault with the bank because they have not taken in the whole £1,200,000 which was subscribed, for they have called in but £72,000, which is more than they now have occasion for. But, however, they have paid into the exchequer the whole £1,200,000 before the time appointed by act of Parliament, and the less money they have taken in to do it with so much the more they have served the public, for the rest is left to circulate in trade, to be lent on land, or otherwise to be disposed of for the nation's service.

All this looks very fine in words; we will put it into figures by and by. I think it must have puzzled the clerks of that day to tell how a bank could pay into the exchequer £1,200,000 with a capital paid in of only £72,000. We understand the thing now, however, by extensive practice in getting up modern banks. Freshmen in college are in the habit of exercising themselves in logic somewhat thus:—"No cat has two tails. One cat has one tail more than no cat; therefore, one cat has three tails." There seems to be no occasion to dispute such a wise conclusion. It is precisely as indisputable as the logic of the proprietors of the Bank of England, that was so satisfactory to the Protestants of England on its establishment, which built up a huge corporation at the cost of the people, and sowed the seeds of the present oppressive and irredeemable public debt.

Francis' History continues:—

The corporation were not allowed to borrow or owe more than the amount of their capital, and if they did so the individual members became liable to the creditors in proportion to the amount of their stock. The corporation were not allowed to trade in any goods, wares, or merchandise; but were allowed to deal in bills of exchange, gold and silver bullion, and to sell any goods upon which they had ad vanced money, and which had not been redeemed within three months after the time agreed upon. The whole of the subscription was filled in a few days, twenty-five per cent paid down, [?] and a charter was issued on the 27th July, 1694 When the payment was com pleted, it was handed in to the exchequer, and the bank procured from other quarters the funds which it required. It employed the same means which the bankers had done at the exchange, with this differ ence, that the latter traded with personal property, while the bank traded with the deposits of their customers. It was from the circulation of a capital so formed that the bank derived their profit. It is evident, however, from the pamphlet of the first deputy-governor, that at this period they allowed interest on deposits, and another writer, D'Avenant, makes it a subject of complaint. "It would be for the general good of trade if the bank were restrained from allowing inter est for running cash, for the ease of having 3 or 4 per cent without trouble must be a continual bar to industry."

Gilbart, in his treatise on banking, says of the Bank of England:-

The corporation were to lend their whole capital to government, for which they were to receive interest at the rate of £8 per cent per annum, and £4,000 per annum for management, being £100,000 in the whole. They were not allowed to borrow or owe more than the amount of their capital, and if they did so the individual members became liable to the creditors in proportion to the amount of their stock.

Now examine the following statement from Lawson's "History of Banking," page 44:—

On the 4th December, 1696, the governor and directors of the bank attended at the bar of the House of Commons, and presented to the house a statement of their affairs, as follows:—

DEBTOR
To sundry persons for sealed bank bills standing out £893,800 0 0
To sundry persons on notes for running cash 764,196 10 6
To moneys borrowed in Holland 300,000 0 0
To interest due on bank bills standing out 17,876 0 0
To balance 125,315 2 11
Total £2,101,187 13 5


CREDITOR
By Tallies in several Parliamentary funds £1,784,576 16 5
By one-half year's deficit of fund $100,000 per annum 50,000 0 0
By mortgages,* pawns, securities, and cash 266,610 17 0
Total £2,101,187 13 5
*This item includes £35,664 ls. 10d. cash, which, it appears, was all the bank had on hand to pay their notes, amounting to £1,657,996 10s. 6d.

The reader, if accustomed to accounts, will probably inquire— where is the capital in this statement? All there is of it is in the balance of £125,315 2s. lid. This covers capital and contingencies. Undoubtedly all the capital paid in at that time was the £72,000 mentioned by Godfrey. Francis must have been mistaken in saying that 25 per cent was paid down, which would have been £300,000 to appear in the balance. The bank had done a magnificent business for two years. The tallies bore an interest of 8 per cent per annum, and the bank was allowed 8 per cent per annum on £1,200,000—of which it furnished but £72,000—besides £4,000 for management. It had paid the heavy expense of its charter and establishment, and 8 per cent per annum dividends for two years to its stockholders, for no "capital" but their name, excepting the £72,000, and had £125,315 2s. lid. left.

For the loan in real cash of £72,000, the bank aggregated interest at the rate of 8 per cent per annum on the subscribed capital of £1,200,000, and allowance for management £100,000 0 0
On exchequer tallies, mortgages, pawns,& c. £1,951,187 13 5
Less cash on hand 35,664 1 10
£1,915,523 11 7
Of say 5 per cent net, after deducting interest allowed on outstanding notes 95,776 3 1
£195,776 3 1

There seems but little reason to doubt that their gross income on £72,000 actual capital was about £200,000 per annum. I believe this bank was the first to call debt "capital," and give the name of "money" to convertible promises to pay. It appears unaccountable that a people can be so deluded as were the people of England then, and as the people of this country are now. They were lending capital to the bank in holding the bank notes, while they fancied the bank was lending them money, and were paying monstrous charges to the bank for the loan of their own capital. We are doing the same with our banking system at this time; it is but a continuance of the system of the Bank of England.

I shall not attempt to reconcile the statement that "the corporation were not allowed to borrow or owe more than the amount of their capital," with the figures as presented by Lawson, for it cannot be done. The truth is, the bank and the government were in partnership, both knowing that they must sink or swim together, and the method by which they obtained means from the people to carry on the wars of that period, and make profit for the bank at the same time, would not then, and cannot now, bear an honest scrutiny.

This seems to have been the discovery of the speculative Scotchman, William Patterson, who projected the Bank of England; that by calling a bank note "money," and promising that it shall be convertible into gold and silver on demand, the people will accept it as money without wishing to convert it, that they will lend their own labor and capital to the bank, and furnish the bank means to pay the note before they have occasion to demand payment of it themselves. Through the sophistical arrangement of this business people do not discover its nature, and usually submit to its impositions without inquiry, but it is only under favorable circumstances that they escape trouble with it. Accordingly, there have been frequent panics and difficulties with the Bank of England. In 1696, the second year of its existence, it stopped payment on its notes in consequence of the recoinage of silver. As the new coin was supplied by the mint this difficulty was soon remedied, but other pressures and runs upon the bank succeeded, until in 1745 it came near being wound up altogether by the invasion of the Pretender Charles Edward. On his entrance into Derby, 120 miles from London, the run upon the bank for payment of its notes drove the directors to the subterfuge of paying in shillings and sixpences, and of employing emissaries to obstruct the access of the creditors of the bank to the teller's counter. These emissaries presented notes, which were paid with as much delay as possible, then passing out of one door and in at another they redeposited the money, took fresh notes, and repeated the operation. By this ruse the bank avoided the suspension of payment, officially, and the directors took much credit to themselves for such sharp practice. A greater relief, however, was afforded by the retreat of the Pretender from Derby. If this had not taken place immediately, the bank would have stopped payment, and probably would have been broken up altogether; crises have occurred with it periodically ever since.

In my September communication I was therefore mistaken, in point of time 28 years, with respect to the commencement of the present system of organizing debt into currency; but I was not mistaken in attributing it to the Bank of England. It was the very principle of its existence—began with it in 1694, and has continued with it to the present day, checked only by such restraint as Sir Robert Peel was able to put upon it in the Bank Charter Act of 1844. By that act the issue of notes on debt security is limited to £14,000,000, which security includes the public debt, constituting the capital of the bank, and some other public dues. Every pound issued in notes beyond this sum must have a sovereign deposited and retained against it. But this limitation principle is not applied to the deposits, which can be increased by discounts indefinitely, excepting the restraint naturally imposed by the export demand for specie. The limitation of issue of the notes is a movement in the right direction, but, with the credits for discounts left untrammeled, it is quite ineffectual to prevent the expansion and consequent degradation of the currency of the kingdom, by which the precious metals are expelled to the continent and to Asia as fast as they are received. This leaves the nation dependent upon debt for the transaction of business, like ourselves, with the exception of the smaller class of traffic, for which cash is secured by the restraint upon bank issues below the denomination of £5.

The truth is, there can be no compounding or tampering with this principle of debt in the currency without serious damage. If it were good, we could not have too much of it, but it is evil continually—unmingled evil—and the first dollar of it is too much.

With $1,000 of real money we know that, by ten removes or exchanges, merchandise to the aggregate amount of $10,000 may be sold without debt or embarrassment; while the absence of the $1,000 of money makes it necessary to sell that amount on credit, notes being created and discounted at bank, one to meet the other, through the whole of the exchanges, till ten separate parcels of debt, of $1,000 each, stand subject to an alteration in the exchange value of money, perhaps four to eight months, and liable to be knocked down, like a row of bricks, on the application of the screw—the power of contraction of bank loans. This is our system, and this is what we experienced last fall.

Now, had we bought $1,000 of gold, to begin with, and retained it, by the sale of two hundred barrels of flour, the wheat grower and the miller would have been thankful for the privilege of producing two hundred barrels more; it would have sped the plow, furnished additional employment to labor through the whole production, been a clear gain of $1,000 capital to the country, increased trade, and, of course, wholly prevented the bankruptcy and distress resulting from the circulation of property to the aggregate amount of $10,000 without it.

What worse than folly, therefore, is the argument of the anti-bullionists, that a country gains by the use of a cheap medium of exchange! That as paper is cheaper than gold, so is the gain to the community in the substitution and use of paper promises and bank credits for money! We should repudiate this doctrine utterly, for it is clearly pernicious and false. What item of wealth can we possess of more utility and value than the commodity which accomplishes our exchanges without debt, and secures us from bankruptcy? and what thing is more worthless than the paper substitute that limits our production and traffic, and entails such wretchedness upon the country as we witness in every bank revulsion?

We want freedom from the present, constant, wasting care of debt; we want heart and spirit unoppressed, to labor with some certainty of reward. These we cannot have while DEBT sits like a Briareus in the center of our system of currency, grasping with its hundred hands all the methods and operations of trade.

I have not any doubt that an inconvertible paper currency, such as governments have issued from the earliest periods of history, is less injurious to the community than the convertible debt currency introduced by the Bank of England; for the inconvertible currency soon falls into line with the marketable stocks of the exchange, and is sold at a discount according to its estimated value. Real money, gold and silver, has a value independent of it—is not degraded by it, but measures its price as it measures the price of other property. A depreciated stock may serve as a medium of exchange, it may be bartered like any other property without being money, and may sink to nothing in the hands of its possessor, as most of the paper currencies of the governments of the world have done, without causing the export of an ounce of gold, or the loss of a dollar of capital to the country. Government paper, passing at a discount, or inconvertible on demand, is nothing but government debt—the same as government stock in principle and effect. The funded debt of England has none of the power or influence of currency.

But the convertible bank debt of notes and credits, formed by discounting a counter debt, is a very different thing. Although pure kiting, it amalgamates with the mass of the currency, and reduces it all in value, without being mingled with it in substance. It is a worthless alloy that costs us solid gold. The foreigner will sell us his goods at the value we put upon the mixed currency, and he will leave our domestic products on our hands at the fancy prices created by it; he will take none of the mixture away, but, separating the dross from the substance, he leaves the dross with us, at the value we put upon it, and takes the solid gold.

By a cabalistic use of the terms "capital" and "money," the wily Scotchman, Patterson, was enabled to impose a prodigious tax upon the people of England, for the benefit of his corporation, without their knowledge. The bank reaped its harvest from fresh soil, having the field to itself, aided by all the warlike and religious prejudices of the nation, and the corporation were thereby enabled to sustain themselves, for a time, upon a foundation that would disgrace a Western wild-cat bank of our country at the present day.

The establishment of the Bank of England was greatly promoted by the extortions of the goldsmiths, who were the previous bankers of the kingdom. For anticipating the taxes, in loans to the government, they frequently obtained interest at the rate of 20 or 30 per cent per annum. They had been plundered by the Stuarts, who had a habit of taking money by the strong hand, and, not yet being entirely confident of prompt returns, they made the new government pay for the perfidy of the old. They loaned money, however, and not debt. The distinction between their dealings and the dealings of the bank is explained by Francis, as already quoted:—"The bankers traded with personal property, while the bank traded with the deposits of their customers. It was from the circulation of a capital so formed that the bank derived their profit."

The clipped coins with their uncertain value, the extortions of the goldsmiths, the bad credit of the government, and the exhausting war with France, would seem to have called for the establishment of some financial regulator as an urgent necessity to England, in the latter part of the seventeenth century, but a true bank, established by authority of the government, to aggregate real capital for public and private uses, was the fiscal agent needed, and not the debt factory contrived by William Patterson.

Prices would then have conformed as they now conform to the volume of the currency offered for investment in the transactions of the day—as money is thrown upon, or withdrawn from, the market, they rise or fall. What possible benefit would flow from the possession of fifty times as much money or currency as constitutes our current medium of exchange today? Flour, now five dollars, would then be two hundred and fifty dollars, per barrel, and all other commodities and property would be in the same proportion. Not a fraction more of business could be done with the whole of it than we do with the more limited currency now—not a dime more of value or wealth should we possess; we should have only the same property measured in price by a cheaper currency. But every intelligent reader must see at a glance that we should operate at an immense disadvantage with such high prices. Where one pound of gold will now discharge a balance of account at home, or adjust exchanges with a foreign country, fifty pounds would need to be transported. It would require more than one cart and horse to make the exchanges of the clearinghouse in New York, and fifty times as much labor and expense in adjusting balances with gold everywhere. To carry gold change in one's pocket, sufficient for the ordinary pocket expenditure, would be out of the question.

Our best interests, the activity of business, the accumulation of capital, the absence of debt, and the prosperity and happiness of all classes in this country, depend upon our having never more, but always less, money or currency than any other people in relation to commodities. That we cannot always maintain this relation I know very well—the production of gold in California is against us. But it is suicidal to increase the currency a dollar when it can be avoided. We want a more valuable currency than any other nation, and this we can have by reducing or restricting its volume, or by increasing commodities. We want low prices for commodities, and a high exchange value to money. We want to sell commodities to other countries, which we shall always do when our currency is more valuable than theirs; for so long we are sure of an average of lower prices. Cannot our intelligent merchants be made to understand that we are better circumstanced with one dollar now than we should be with fifty dollars if the currency were increased fiftyfold? Cannot they see that when an ounce of gold buys more of the product of labor here than anywhere else, we have the commerce of the world at our command? This will be seen. The science of political economy will not always be neglected by merchants, and left in the hands of closet students. The industrious nation, cultivating with intelligence the arts of peace, which shall first repudiate the convertible debt system of the Bank of England, and the doctrines of Adam Smith, John Stuart Mill, and the other anti-bullionists of England regarding paper money, and so shape its policy as to give the highest possible value to its currency, will infallibly get advantage of the commercial world.



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