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Organization of Debt into Currency and Other Papers
by Charles Holt Carroll

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Chapter 13
New Views of the Currency Question, II


(Reprinted from The Bankers Magazine and Statistical Register, XIII (May, 1859), 833-42.)

The currency of this country, as I stated in your March number, is approximately two-thirds debt and one-third money; the proportion of debt being greater than in any other convertible currency in the world. A very large portion of the circulation is below the denomination of five dollars; one pound notes being the lowest known elsewhere, and these only in Ireland and in Scotland. This description of currency is co-existent with the Bank of England, and, with the bank itself, appears to have arisen from a public exigency. During the reign of the Stuarts the public finances were in continual disorder: their rapacity and extravagance, coupled with the absolute needs of the government, were the chief causes of the political complications that cost the monarch Charles I his throne and his life. On the Protestant accession of William III the financial difficulties were at their height. At the same time the war with France required large sums of money, which were raised with extreme difficulty and at great sacrifice; frequently the parliamentary grants yielded to the national exchequer but half their amount, owing to the necessity of anticipating the taxes and to the bad credit of the government. Tallies—notched sticks—then the vouchers of the public debt, were at 20, 30, and sometimes 40 per cent discount. Commissions and various extortions of the goldsmiths, who were the bankers of the kingdom, and of the tax-gatherers, completed the reduction.

In this emergency a Scotchman—William Patterson—devised the scheme of raising money for the support of the war by taking it from the currency and the country, and putting debt in its place, through the instrumentality of a chartered bank. For this purpose, and on this plan, the Bank of England was chartered and went into operation in 1694. The subscribed capital was £1,200,000, all to be loaned to the government for an annuity of £100,000 per annum, being 8 per cent for interest, and £4,000 for expense of management. Six per cent, or £72,000, of the capital was called in, and then the whole sum of £1,200,000, was paid in to the government exchequer, but how? Simply by making and passing to the exchequer, in the form of bank notes, promises to pay money the bank did not possess, in exchange for exchequer tallies—promises to pay money the government did not possess, nor ever have possessed to this day, for it was the commencement of the present oppressive and irredeemable national debt.

This, stripped of all its complications, is the principle of convertible debt banking; it is borrowing evidences of debt without interest, and lending counter evidences of debt at interest. In its origin, as here stated, it is plainly seen; but when complicated with deposits, absolute and fictitious—with the circulating notes and coin, and the intertwining of debt through the whole system—the public mind is thoroughly befogged with it. Nothing is created by this operation but debt—no capital, value, or wealth whatever—but price is added to commodities thereby as effectually as if so much gold had been produced or earned by labor and added to the currency, and multiplied obligations of debt succeed —promises to pay value that never existed, and which consequently cannot be ultimately paid. If the subscribers to the stock of the bank had paid in the £1,200,000 loaned, it would have been all right; a value in that portion of the currency would simply have been transferred; it would have added nothing to the currency—nothing to prices—nothing to the pecuniary obligations of the people. But as it was, the system was then inaugurated of adding convertible debt to the currency which should be money, degrading its value, expelling the money, limiting the exports of merchandise, and transacting the business of the country with debt.

There is a discrepancy in the early accounts, regarding the proportion of money paid in to the capital stock of the bank; Francis, in his history of the bank, unaccountably stating it to have been twenty-five per cent, when he might and ought to have had access to a pamphlet published in 1695, by Michael Godfrey, the Deputy Governor, in which the amount is distinctly put down at £72,000. Godfrey says:—

Some find fault with the bank because they have not taken in the whole £1,200,000 which was subscribed, for they 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.

This ridiculous sophistry lies at the foundation of the prevailing system of banking to-day. Here were men, by calling themselves and being called a "bank," taking a clear interest of 8 per cent per annum on their own "bills payable"—the expense of management being otherwise provided for—6 per cent only of money being used in the business. That the sum paid down was no more is obvious from the following account presented by the governor and directors of the bank at the bar of the House of Commons on the 4th December, 1696:

DEBTOR
£. s. d.
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 of £100 per annum 50,000 0 0
By mortgages, pawns and securities 230,946 15 2
By cash 35,664 1 10

Total £2,101,187 13 5

Mr. Lawson, in his history of the bank, remarks that the item of £35,664 was all the cash the bank had on hand to pay their notes amounting to £1,657,996 10s. 6d. The truth is the bank was in a state of suspension in 1696, on account of this preposterous expansion of liabilities and the recoinage of silver then taking place, which temporarily removed so much coin from circulation, that, with the amount forwarded to maintain the war in Belgium, they could not pay their notes. It is evident that 25 per cent—£300,000 of the capital—was not paid down as stated by Francis; if it had been, every reader acquainted with accounts will see that it would appear in the balance of the above account, which, including the capital, is but £125,315 2s. lid., just enough to cover the £72,000 and its gains.

The Bank was making large gains; it was receiving 8 per cent per annum over expenses on a capital not paid up, and then a further sum, not stated, on the loan of its notes.* It had paid two yearly dividends of 8 per cent each, and accumulated in two years £53, 315 2s. lid. beyond the £72,000 of capital called in. It appears from the foregoing account that the Bank had made an arrangement to pay interest on a portion of its notes, probably at the rate of 4 per cent per annum. D'Avenant, a writer of that day, makes it a subject of complaint. He says: "It would be for the general good of trade if the Bank were restrained from allowing interest on running cash; for the ease of having 3 or 4 per cent without trouble, must be a continual bar to industry." He does not observe the distinction stated in the balance sheet between the running cash and the sealed bills: doubtless interest was allowed on the sealed bills only. It will be observed that the interest due of £17,876, as stated in the balance sheet, is precisely 2 per cent on £893,800, the amount of the sealed bills; being 6 months' interest without doubt. The tallies bore interest at the rate of 8 per cent per annum. Altogether this must have been a pleasant business for the stockholders. Their £72,000 invested in 1694 had earned them in two years, clear of expenses:

Two dividends of 8 per cent each £192,000 0 0
Surplus profits undivided 53,315 2 11

£245,315 2 11

A very handsome return, certainly, for the investment of only £72,000. The holders of the bank notes were taxed this sum without knowing it, and the notes handed in to the exchequer were exchanged for coin that was sent to Namur in Belgium, for the prosecution of the siege of that place, the success of which was attributed to the remittances thus obtained. A sum of money was thus drawn, under a disguise, from the pockets of the people, which they would hardly have paid as a direct tax, and the nation was drained of so much real capital by the substitution of a fiction of capital in its place.

It would exceed the limits and design of this article to pursue further the elaborate history of the Bank of England. I merely present these early figures of the institution to show the distinction between the inconvertible currency previously existing, as described in my former communication, and the convertible currency created by the Bank, and used as equivalent to money, in their relative effects upon commerce and wealth. The former cannot long retain the power of money, if the smallest fraction in excess of the true specie measure of currency is created thereby. It soon falls below par, and, although it may be employed as a medium of exchange at a reduced valuation, does not degrade the value of money, because it comes to be valued in money like any other debt or public stock. The Bank of England notes, during the suspension of specie payment at the recoinage of silver in 1696, fell to 20 per cent below par, and again during the long suspension from 1797 to 1821, they were below par a great part of the time, being an organized circulating debt valued, according to its utility and scarcity, in gold and silver. The three per cent consols of England could be employed as a circulating debt in buying and selling at 5 per cent below par to-day, perhaps, but they could not be money or currency—themselves the measure of price—without immediately exhausting the coin and bullion of England. No doctrine of political economy is better established than that of Adam Smith, that no community having an open commerce can maintain a volume of currency, in relation to commodities, exceeding that of any other community accessible to a direct or indirect trade. It follows that if the public stocks of England were available, or used, as currency, amounting as they do to nearly four times the currency of the kingdom, all the coin would be exported or retreat into hoards, and the stocks would fall to about one-fourth of their nominal value. In truth, therefore, inconvertible paper promises to pay, unless the whole volume of currency of which they form a part is less than the relative proportion of specie to commodities existing elsewhere, do not act as money or currency, but when they do not cause the currency to exceed that volume they do so act. Thus there was a considerable period during the suspension of the Bank of England, between 1797 and 1821, when, the issues of both notes and credits being carefully restricted, its notes were at par with gold and silver, but the moment the specie measure was exceeded by those issues they fell, and the curious position was taken by many intelligent writers, that the trouble was in the rise of bullion and not in the fall of bank notes. This also explains the condition of the debt currency of New York at and after the suspension of specie payments in October, 1857. By the previous severe contraction, the whole volume of currency was reduced below the true specie measure in proportion to commodities; consequently its value was maintained at par; specie rushed to New York, as the creditor city of the country, from all directions, along with our domestic products, which were abundant all over the country, and were exported to Europe in double the quantity sent forward in the same period of time the previous year, notwithstanding the abundant crops there. Exchange ruled for a time 8 to 10 per cent in our favor, and gold commenced to return rapidly from Europe, but all this did not suit the dividends of the banks; they immediately ran up their loans, checked the export of commodities, piled up the flour and other products till the warehouses of the city broke down under the weight, turned the rate of exchange against us—of course stopped the inflowing of gold, and turned the stream outward again. So we returned to our old folly of selling our money, keeping our merchandise, and living in debt.

Now, this is the distinction between the two sorts of currency we are considering. An inconvertible debt currency may be used like a convertible one, to the limit of the specie measure without degrading the value of money, and without checking the export of commodities or causing the export of specie; but when increased it will reduce its own value, or price, just in the proportion that the whole currency exceeds the true specie volume. On the contrary, the convertible currency, by being equivalent in use to gold, degrades and expels specie by adding itself to, and exceeding the specie measure at once. It adds itself to the price of things, checks the exports, attracts the imports, and causes an absolute loss of its whole amount to the country or community that employs it. The inconvertible currency only degrades itself, while the convertible degrades the value of gold and silver until it displaces them, and occupies their place.

It is owing to the prevailing and fallacious notion that money is a measure of value, fixed and absolute, that its degradation is not perceived, but when the power of money to purchase commodities declines, by reason of the increase in the volume of currency offered in exchange for them, it is the value of the money that falls, and the price, not the value of commodities, that rises. We continually waste our gold by not comprehending this operation of the law of value. I have demonstrated this in your pages before, but the subject is so important that the demonstration will bear repetition.

Let us suppose that the United States possess an exclusively metallic currency amounting to five hundred millions of dollars, and adopt one commodity as the representative of all the others—wheat, for example. With this volume of currency wheat is saleable for export we will suppose at $1 per bushel, that being the exporter's limit, because at the same or a trifling higher price he can buy it in the ports of the Baltic or Black Sea. Now, if we go into the debt banking business, and by exchanging notes and credits with the banks, add one hundred millions of convertible dollars to the currency, without increasing the supply of commodities, we shall infallibly stop the export of wheat by raising its price in the ratio of the increased currency, i.e., 20 per cent; wheat will be $1.20 per bushel. We must pay for the imports, and, as wheat can no longer be shipped, the exporter will ship $1.20 of gold instead, with which he will buy in the Baltic 20 per cent more of wheat than he can buy here with the same sum of money. The 20 cents of currency thus added to the price of the bushel of wheat is not value, for no property was created with or by the additional currency; it is price—a mere fiction of value; but it is no fiction in its effect upon gold; it is a depreciation of its value, and what we have done is to sell $1.20 of gold for the value of $1; for one dollar is the true value of the bushel of wheat left in its place. This operation will continue upon the average of commodities, some of which, like cotton, owing to our natural advantages, may still be exported, but lessening in degree until one hundred millions of gold is expelled, and the one hundred millions of bank debt fixed in the place of the gold, when the volume of currency will stand in amount as before, but different in character, four hundred millions being money and one hundred millions debt, and prices return to their normal position. Then, the demand for gold to export having stopped and merchandise furnishing our means of paying debts abroad, the banks, by the law of their existence, must inflate again; they can make dividends only by lending their debt; they add another one hundred millions of debt to the currency, which again adds price without value to commodities accordingly, stops the export of merchandise to the amount of one hundred millions of dollars, increases the import of commodities attracted by our high prices, many of which come into competition with our home labor, expels another one hundred millions of specie; and, after the usual fall of prices, revulsion and bankruptcy, we fall back again upon the natural volume of currency, now still more unnaturally constructed of three hundred millions of money and two hundred millions of debt. This operation, stimulated by the competition of the banks for dividends, will be repeated as money is earned and brought into the country, until it is restricted to the narrowest limit that will maintain specie payments. This limit depends upon no law, but so much upon the uncertain forbearance of creditors, that it can never be accurately determined and guarded against in advance; it is continually being exceeded by individual banks and they break: three times it has been so generally exceeded by all the banks in the country, as to cause a general suspension of payment, namely, in 1814, '37 and '57. In 1837 the average of specie to their immediate liabilities held by the banks was as nearly as can be ascertained $13.70 to the $100, and in 1857, $13.60 to $100; yet in New England, so great is the preference for debt and the competition of the banks in organizing it into currency, they frequently hold but 10 per cent of money to their demand liabilities on the average, and in Rhode Island alone sometimes only 4½ per cent.

But there is still a large amount of specie in the country beyond the reach of the banks, and yet within the limits of the currency; that is, not in hoards. I think this rarely amounts to less than one-third of the total currency of the country. No doubt this is the more sluggish portion, the most active part of this being where it is least suspected, namely, in the reserve of the banks, where its ownership circulates rapidly without the removal of the coin itself: from this it varies to the slow-moving stocking deposit of the Dutch farmer and the uncertain confines of the hoard.

In the argument I now have to offer upon the most destructive principle of our mixed currency, I propose to assume this money portion of it to be one-third, not inferior in activity to the debt portion of two-thirds. We had in 1857 four hundred millions of bank circulation and inscribed credits, and two hundred millions of money, making altogether six hundred millions of currency in the whole country, and we shall soon have the same amount again.

Everyone knows that the money of every nation constitutes but a small portion of their property; the currency, however constituted, is always the same in volume, permanently, as the circulating volume of money would be if the currency were all specie. The proportion of currency to the whole property of this country and of most commercial countries is and must be approximately as 1 to 25. I consider this ratio so well determined by natural laws, that if I would estimate the whole amount of the property of the United States I would rather know the sum of the currency, and multiply it by 25, than to have the most elaborate statistics otherwise prepared. But Secretary Guthrie's estimate in 1855 confirms this ratio. With great labor he collected statistics from all parts of the country, and concluded that the whole property of the country then amounted to $11,317,611,000. This is nearly the sum of the currency of that year multiplied by 25; but the estimate is a little too low, as Mr. Guthrie thought himself.

On this ratio, the volume of our currency being six hundred millions, the whole property of the country in and out of market amounts to fifteen thousand millions of dollars. Of this about two-fifths is constantly offered for sale, or, in the language of political economy, "in circulation," to be exchanged against the whole sum of currency. The relative activity of currency and property is therefore as 10 to 1, every dollar of currency performing the average circulation of ten dollars of property; thus we have on the average six thousand millions of property constantly in circulation reciprocal with the currency. It is perfectly obvious that the two hundred millions of money circulates, or may circulate, the average amount of two thousand millions of property without debt, and its function being thus employed, the other four thousand millions of property must be circulated through the medium of the four hundred millions of bank debt. However these two portions of the currency may mingle in their operations, it is quite certain that the average effect must be to distribute two thousand millions of property in sales for cash, and four thousand millions in sales on credit, and that four thousand millions of dollars in obligations of debt must exist, depending for the means of discharge upon the wholeness of the four hundred millions of debt currency, that can only be maintained by continual renewals of debt and discount. Now it is utterly impossible to maintain the integrity of this portion of the currency; it will expand with the forbearance of creditors to demand specie to the utmost limit of the safety of the banks, and it will contract five or ten dollars for every dollar of specie withdrawn for export, according to the proportion of specie to the immediate liabilities of the bank that may happen to be drawn upon. Every dollar of its expansion will add ten dollars of price without value to the aggregate of property and to obligations of debt accordingly, that must rest upon it for the means of discharge; and every dollar of its contraction will destroy the ten dollars of price before created, and stop the payment of that sum of the money obligations of the people to each other.

In August, 1857, the total currency of the United States exceeded six hundred millions of dollars: I think it was six hundred and ten millions. This was reduced by the curtailment of bank loans one hundred and sixty millions in two months, from the middle of August to the middle of October. I have not any doubt this stopped the payment of one thousand six hundred millions of debt in the fall and winter of l857-'58, much, probably most, of which was among small traders and producers all over the country who are unknown to banks or mercantile agencies, it being for the interest of all parties concerned to be silent upon the subject, and large amounts were compounded without open defalcation. This sort of curtailment is very different from that produced by the export of specie. Specie cannot be taken from us without being bought—a value takes its place that will command specie in a re-exchange with another nation or community. It is entirely impossible to go far in reducing the currency by merely exchanging specie for commodities, because every step in that direction tends to equation; commodities fall in price and money rises in value—things come to a level directly. But the curtailment of bank loans is a mere exchange and offset of one debt against another; no value remains; it is the annihilation of so much of price with so much of the currency. The most prudent man is liable to be ruined in this way if he happens to be in debt when the curtailment takes place. A man may be worth $10,000, owing $20,000, and having $30,000 assets. A contraction of the currency that reduces general prices one-half sinks not his net estate merely, but the means of his debtors, and his whole assets of $30,000 to $15,000; he is now bankrupt $5,000, without any fault or imprudence of his own. I knew several as severe and honestly unfortunate cases as this in the winter of l857-'58.

There is another mischievous power in the debt currency that is seldom considered. Commodities pass through five exchanges from the raw material to the consumer on the average; the continual loss of debts by our expanded credits compels the traders to charge a large percentage on each sale, to cover the risk this system entails upon them. This charge by wholesale and retail dealers is believed to average not less than 4 per cent on each transfer; thus commodities reach the consumers burdened with about 20 per cent of price to cover this abnormal risk: producers must be repaid this change, and of course add it to the cost of their productions, which thus come into the world's market, greatly at disadvantage, in comparison with those of every nation possessing a more valuable and stable currency. The obstacle to our export trade created by this is very great, but has never been estimated. These five exchanges from the raw material to the consumer, going and returning, complete the circle of ten that I assume as the average relative activity of the circulation of currency and property.

The popular cry against a bullion currency exclusively is "the fall of prices" that would result therefrom: this is a groundless conceit, scarcely creditable to the intelligence of our bankers and merchants. How long should we retain flour, wheat, beef, pork, or any other product if it would pay five, or even one per cent more profit or less loss than gold in balancing the account of our imports? Not a moment longer than the time necessary to disclose the fact. Commerce is lynx-eyed in this matter, and never permits gold to leave the country, when it is appreciably more valuable here than merchandise, and never detains it when its value is appreciably less. London being the centre of commercial exchanges, the exchange on England determines whether our prices are above or below the specie measure, and the rate of exchange is the true exponent of the deviation. One-eighth of one per cent difference of value between gold and the average of merchandise will at any time determine whether gold or merchandise shall pass either way between Boston and New Orleans, or between London and New York. There is a singular delusion in the minds of men on this point, in the face of facts of daily experience. What we do with our debt currency is to degrade the value of gold and silver only so far as to make money cheaper than merchandise, expel the money, keep the merchandise, and thereby prevent the accumulation of wealth in the creation of more merchandise to the same extent, substitute debt for money in our exchanges to the utmost limit, extend credits to 8, 10, and 12 months, and forever; keep a stream of bad debts in the current of trade that gather at times to a torrent, and sweep the fortunes of the enterprising and industrious into the pockets of capitalists, and spread anxiety and wretchedness broadcast among the people: but as to the aggregate wealth of the country, it makes only the difference of about $50,000,000 yearly loss in the export of specie, with the profit that so much capital would earn. Mostly the operation is to plunder the debtor, and give to the creditor, by a transfer of capital in our own country, making no difference in our aggregate wealth in this respect, excepting so far as the general embarrassment suspends production.

Who would discover a difference of price, more or less, in commodities of 1/8 or 1, or even 5 per cent in the average, caused by the alteration of the volume of the currency by the change from money to debt, or debt to money, where every commodity, being affected by its own variation in supply and demand, is continually varying, from one to one hundred per cent in price? Flour is sometimes $5, and sometimes $10 per barrel, and all other commodities are more or less affected by the law of supply and demand, without regard to the exchange value of money.

The fundamental error of our financial policy lies in the attempt to create wealth by creating currency: it is putting the servant before the master—the wrong power, in advance. We can create wealth only by producing commodities. The nation that pursues this policy will have, not only the most wealth, but the most money; they will have the least debt, and of course the least embarrassment; they must sell commodities and buy money: this is the present policy of France, whose currency now consists of about 1,000,000,000 dollars of gold and silver coin, and 100,000,000 dollars of bank debt in excess of the coin. She sells her products to England and the United States at our paper prices, and takes our gold in exchange. Of course there is almost no debt among her people; her home traffic must be conducted according to her currency about one-eleventh with debt, and ten-elevenths with money. Every trader and producer in the interior of the empire is said to be in possession of a bag of coin for his smaller traffic, and the larger operations are made through local bankers. New Orleans, notwithstanding her sickly climate, is, with her improved currency, according to her means in commodities, obviously getting the advantage of New York in commerce, and New York, with a better currency than Boston, is getting advantage of Boston. The State of Arkansas, having had nothing to do with debt banking, since the embarrassments created by her two banks about 1842, from which she is not fully recovered, passed through the late financial crisis wholly unscathed, and is now thriving beyond any former period of her history.

I am very much gratified to find the Bullion Bank of New York has become a fixed fact. It is an evidence of a change of system soon to follow the present, and of sounder views of currency than have hitherto prevailed. I wish it all success. It cannot be doubted if that bank succeeds by charging a fee on its deposits, that it will become manifest another may succeed with an increased business, by paying interest on deposits borrowed on time, and lending at a profit on the rate of interest paid; lending deposits when they are deposits, but not while they are undrawn loans; that is, by keeping always coin or bullion in reserve, dollar for dollar of its demand liabilities. With a reasonable capital such an institution would be a far safer depository than the present Savings Banks, for they have no capital at all, and are liable to great changes of value and consequent risk, from the long period covered by their loans. The increase of deposits in Savings Banks, and the enormous entanglement of debt produced thereby, are in my opinion charging a mine under the property of this country, that a spark may explode while we are in the enjoyment of fancied security.

We must look to the bankers and merchants for this improvement of bullion banking. Neither this nor any other improvement in banking or currency will ever come, in my opinion, from State legislation, for the reason that a sufficient number of disinterested men, of intelligence enough to understand the subject, cannot be found in any State legislature in the country, with the exception of that of Arkansas, where they have learned wisdom from painful experience, and from the lessons of Mr. Wm. M. Gouge, who has been occupied laboriously in Arkansas for several years in clearing up the rubbish of their two broken State Banks.

An institution of this character brought into activity in the full channel of trade, with a controlling capital, will speedily put a stop to debt banking in this country, for the other banks must then follow the same course or break, and it will place New York infallibly at the head of the commercial cities of the world.




*McCulloch says:—"The Bank discounted private bills at 5 per cent, during nearly the whole period from her establishment till 1824, when the rate was reduced to 4 per cent." The credit of the government was at first inferior to that of individuals.

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