Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
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Chapter 12
New Views of the Currency Question, I
(Reprinted from
The Bankers' Magazine and Statistical Register, XIII (Mar., 1859),
673-77.)
I wish to make a distinct statement in your pages of the currency principle of the
Bank of England, by reference to its early figures, and show, as briefly as possible,
in what respect it differs from any system of banking or currency before introduced,
at least so far as my investigations have enabled me to discover the facts. I wish
also to say, what I have often said elsewhere, that I view the present banking system
in this country, which is that of the Bank of England, as I view a bad or unprofitable
fashion that tyrannizes over my family and my purse, as a thing to be opposed or
reformed by all lawful and practicable efforts. I find an institution of hoops and
crinoline surrounding my wife and daughters against their better judgment. It is
a tyranny of taste introduced, I suppose, by the Empress Eugenie, to promote the
manufactures and the trade of France, which it has done most effectually; the silkworms
of the whole empire being altogether overtasked to supply the material for the ample
skirts demanded by this preposterous fashion. I find the haberdasher catering to
this taste with all his art. The more numerous and ample the petticoats he can put
into my expense account, the more he gains at my cost. Do I blame or quarrel with
the haberdasher? Surely not. He finds a public taste prevailing and furnishing a
respectable business, out of which he makes all the profit he can. No
man of common sense blames him, however he may oppose the fashion, as I do all I
can, and pay the bills at last.
This is precisely my position in relation to the banks. Many of my best friends
are intimately connected with, or immediately concerned in, the system of debt banking;
it is the only method by which they can control any considerable business facilities.
I cannot avoid connection with it myself, and have yet to see the bank officer or
director who ever objected to granting me a discount because of my opposition to
the system. In truth, many of its best informed and strongest opponents are among
bank officers and bank directors, and some of them protest against it as openly
and heartily as myself. I speak of the banks as the exponents of the system; it
cannot be avoided; but your readers will, I trust, comprehend the distinction between
the system I condemn and those concerned in its direction and details.
The celebrated Prussian professor of the Asiatic languages, Henry Julius von Klaproth,
in a paper read to the Asiatic Society of Paris, states that he found in the Chinese
annals the earliest financial operation of the Chinese ministry to meet the public
expenditures, which had become too great for the revenues of the state, to bear
date in the year 119 before the Christian era. At this period they introduced the
phi pi, or value in skins, which were skins of certain white deer
that were fed in the interior park of the palace. They were current in the palace
and among the grandees at a price equal to fifteen dollars of our present money,
but it seems they never passed as money among the people. This was skin money—a
money of value—to which I can see no objection except its inconvenience
in size. They were a foot square Chinese measure, and were ornamented with extremely
delicate paintings and embroidery.
There was a general derangement of affairs in China, about A.D. 605-617, and all
sorts of things were used for money—circular plates of iron, cut pieces of cloth,
and even pasteboard. About A.D. 807, coined copper had become exceedingly scarce,
by reason, chiefly, of manufacturing a great amount of bronze images representing
Foe and the saints of his religion. The emperor then renewed a former prohibition
against making vessels and utensils of that metal, and compelled the traders and
rich families to deposit their specie in the public chest. For this specie they
received certificates called "flying money," but in three years their use in the
capital was suppressed: for some time longer they were current in the provinces.
A.D. 960, a system of depositing silver in the imperial treasuries was established,
for which securities were issued, called "convenient money," that were eagerly received
everywhere. About this date we first hear of the issue of a regular paper money
currency, namely, paper bills substituted for silver and not guaranteed by any pledge
whatever: these were called tchitsi or coupons, and were first
issued in the chou country, now the province of Szu-tchouan, as
a substitute for the iron money, which was too cumbrous. This example was followed
in the reign of Tchin-tsoung—A.D. 997 to 1022—and bills were issued called
kiao-tsu or "exchanges." Every kiao-tsu represented one ounce
of pure silver. Sixteen of the richest houses conducted this financial operation,
and in the end were all ruined. The emperor then abolished the bills of this company,
reserving to himself the establishment of a bank for bills at Y-tcheou.
These kiao-tsu appear to approach the nearest to the convertible system
of the Bank of England of anything I find in history, previous to the establishment
of that bank in 1694, but they were not the same in principle, as may be seen at
a glance. If I understand the account, they were issued from time to time payable
at three years' date; it does not appear what securities the issuers received, nor
what the government had to do with the scheme, but the sixteen rich houses were
called directors, and, as they seem to have been responsible for losses, may have
been the proprietors. In any event these bills must have been, for a great part
of the time, like any other securities in market, subject to an alteration in value
in relation to silver according to supply and demand.
It is not necessary to pursue the history of paper money in China further, except
to say that the government took the whole business of making and issuing paper money
into their own hands, if they had relinquished it in the case of the kiao-tsu,
which is doubtful, and the nation had all manner of difficulties with it. The Mongols,
who made themselves masters of China, and founded a dynasty there called Youan
in the latter half of the 13th century, were compelled to abandon the empire in
consequence of the ruin they had wrought with an emission called paotchao
or paper money of value. These Mongols introduced the same into Persia.
After centuries of bankruptcy and confusion in their financial affairs, the Chinese
finally banished paper money from the empire, about the year 1445, and there seems
to be no further mention of it. As to the shroff chop notes, now used there by brokers,
they are merely memorandums of balances of money due from one to another, like our
borrow and loan tickets; they are not an issue beyond value, like our bank
notes.
China is now reaping an immense advantage, in the increased sale of her products,
by maintaining the most valuable currency in the world. This she does, simply, by
confining it to its natural volume, and producing commodities to such an extent
as to keep her money relatively more valuable than her merchandise. The silver of
the world, and much of the gold, must flow to her, to the extent of her means in
surplus commodities, which are very great by reason of her monetary policy. This,
and nothing else, excepting a slight action in India of the same sort, is the reason
of the great export of silver from Europe to Asia. China is doing what we ought
to do—selling goods for cash. Her people are keeping out of debt by using money—a
currency that does not depend for its existence upon debt and discount. The reader
will please not jump to the conclusion that we must adopt the errors of China, and
become Chinese, by employing a metallic currency, which we should improve with coin
certificates for portableness without doubt. This is too apt to be the method of
arguing against a pure money currency in this country.
Inconvertible paper issued by government is undoubtedly bad enough, as we see in
its Chinese history, for, with the possible exception of the kiao-tsu,
it was all government paper, and if further evidence were needed, we have it in
the provincial and continental money of this country and the assignats and mandats
of France. But I yet doubt if it be as destructive to the fortunes and general interest
of the community in its constant effect, as the convertible currency—bank notes
and balances—of our present system; because it does not necessarily create a debt
beyond itself: it does not require a debt for discount to produce it. Its affinity
is with property—not with money. It rises and falls, in relation to coin in which
it is nominally payable, and which is the true money, precisely like government
stock or any other property having a price, and coin has its natural value independent
of the paper. Always, where such paper exists, there are two measures in the market;
the coin remains the true one; and a debt for $100 contracted in inconvertible paper
can be paid with $50 of coin when the paper is 50 per cent below par, because the
debtor will buy the paper with his coin if it be his interest to do so. It is not
so with the convertible currency; coin with that has not an independent value. When
prices fall one-half, by reason of the contraction of the volume, and consequent
appreciation of the value, of the currency, the true gold measure of $50 will not
pay a debt of $100; we must give double the property for which the debt was contracted
to discharge that obligation. The whole hundred dollars must be obtained from property
fallen in price one-half, not because the property has fallen in value—it
may not have altered in value in the least—one commodity may purchase just as much
of any other commodity and of all commodities as before—but because money or currency
has risen in value by scarcity in relation to the demand 100 per cent.
During the long intervals of centuries not mentioned in the Chinese annals, there
must have been periods of prosperity in business with their paper currency. They
have always been an industrious people, and everywhere work produces wealth. Commodities
pay for commodities in any currency, and the volume of currency necessary to effect
the exchanges is wholly immaterial, if it to be left to the operation of natural
laws. Buenos Aires prospers with a wretched paper currency, 21 ½ dollars of which
are worth but one of ours to-day. Their currency is valued by the doubloon of $16—so
that, after all, their money is gold and silver, and their currency fluctuates
in price, precisely like a public funded debt. With their valuable and indispensable
commodities, such as hides, wool, tallow, horse hair, jerked beef, etc., they keep
the exchanges in their favor with all foreign countries, recently, and we are obliged
to pay them largely in coin, or in exchange on England. The merchants of Buenos
Aires are gradually dropping the use of the paper currency in one commodity after
another, and using directly silver rials and gold doubloons. We, with our self-destructive
expansion of a convertible currency, are creating enormous prices for the commodities
of Buenos Aires, and paying for them in gold, enriching Buenos Aires at our own
cost, and by our own folly. That country will shortly have only a pure metallic
currency. An inconvertible currency is more vexatious than unprofitable, while a
convertible one is more unprofitable than vexatious.
Everyone who has attempted a careful investigation of this subject knows the great
need there is of a nomenclature that will convey and not conceal ideas in reference
to it. The sophistication of words has so sophisticated ideas, and stereotyped the
false meaning, that scientific demonstration makes but little impression upon the
public mind. That which it requires money to pay, obviously is not money
but debt, the very opposite of money. Because we can buy with a bank note,
people are possessed with the idea that it is money. So we can buy with a breath—a
word of mouth, and make it effectual in the transfer of debt—is it therefore money?
A promise to pay is debt, whether verbal, written, or engraved; value is
not in the debt but in the thing promised—the "pay" itself. Currency here consists
of all the dollars, real and immediately convertible, offered to be exchanged against
property offered for sale, or customarily used for the payment and transfer of debt.
Our money currency pays debt and ends it with value; the debt
currency merely transfers debt with a promise to pay a value hereafter,
but that hereafter is a fatal period. When value is demanded of that currency, a
thing is demanded that was never loaned—a thing that never existed. In all other
exchanges affecting price a value passes, but in the exchange which produces the
debt currency there is none: it is the production of a fictitious dollar which enters
into price and creates an obligation of debt as binding as if it were a dollar of
value created from solid gold, but there is no dollar there, and when the demand
is made of payment, it must be met with the thing it was made of—a promise to pay;
when that will not answer bankruptcy must settle it.
Now our currency thus offered and thus used amounted altogether in the early part
of August, 1857, to about six hundred and ten millions of dollars, consisting
of bank debt in notes, and inscribed credits over and above the coin reserved in
the bank coffers $410,000,000, and coin not in hoards $200,000,000, the coin in
the banks being included in the two hundred millions, of course. Of this coin the
most active portion is in the notes and credits of the banks, which circulate its
ownership whether the coin is removed or not: so far the bank liabilities are true
money. Next is the coin below the denomination of $5, in those States where the
issues of small notes have been suppressed, and fractions of a dollar everywhere.
The rest is sluggish, some among the western immigrants, some in the stocking deposit
of the Dutch farmers, and thus varying to the confines of the hoard.
I find no account of anything resembling this debt currency of $410,000,000 before
the founding of the Bank of England—a currency of debt convertible on demand into
coin, and thus having an exchange value equivalent to coin with no coin to convert
it into—an amount of currency payable at sight in dollars over and above all the
dollars in the country; simply debt with no value opposite—nothing but
another debt like itself.
The Banks founded previously to the Bank of England were as follows:—Bank of Venice
in 1171, Bank of St. George at Genoa in 1407, Bank of Amsterdam in 1609, and the
Bank of Hamburg in 1619. All of these were merely banks of deposit and transfer,
excepting the bank at Genoa, which was a bank of circulation also. The others were
government institutions; this at Genoa was conducted by a company of shareholders,
and it advanced immense sums to the government. I cannot learn that it ever advanced
or circulated anything but coin or bullion; certainly it never issued "promises
to pay," or inscribed credits for specie not in its coffers.
Now we are prepared to examine the principle of the Bank of England. I will follow
this article with an account of that celebrated bank in a few weeks.
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