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

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Chapter 14
Bankruptcy in the Currency


(Reprinted from Hunt's Merchants' Magazine and Commercial Review, XL (June, 1859), 673-88.)

To the Editor of the Merchants' Magazine:—

I transmit to you for publication a paper read by me before the Board of Currency of New York. It contains some thoughts that I have before expressed in your pages, but as they are necessarily connected with what I conceive to be a fatal principle in our currency system, that I wish to expound to your readers, I will thank you to present to them the article entire.


It is well known to you, Mr. President and gentlemen, that I consider the currency of this country, and of other commercial countries, to contain a fatal principle of bankruptcy, the operation of which cannot be avoided by the utmost frugality of life or prudence in business. So far as I know, the exact nature and the extent of this principle have never been made the subject of scientific investigation. Although the general fact is well understood that contraction must follow the expansion of bank loans, and bankruptcy be the consequence, it is generally supposed that ordinary prudence in the conduct of banks and of individuals will save the debtor from failing, at least, if not from harm. The absolute law by which failure becomes inevitable, and the extent of its action, I propose to consider tonight, and ask your investigation of the subject.

The currency is of two sorts, related to each other like good and evil, or truth and falsehood; they are money and debt—elements as antagonistic as any two in nature. Our concern is with the debt currency; without this we need have no concern whatever about money, more than any other commodity—without this value and price would correspond, and money, by the natural law of value, would flow to that market, and be of ample volume in the community possessed of the greatest enterprise and industry with the least unproductive consumption, because there money must possess the highest relative value.

The community that produces and maintains the greatest quantity of commodities of general utility, in relation to the volume of their currency, or the least volume of currency in relation to their commodities, will inevitably sell commodities in exchange for the money of other communities. This law, so simple and obvious that he who runs may read, is constantly violated in our financial and commercial policy. We busy ourselves to the utmost extent in degrading the value of money by increasing the volume of our currency, and thus sell our money, keep our merchandise, and transact our business with debt; when no people on the face of the earth are so favorably circumstanced to maintain a currency of money, do business for cash, and export merchandise. Instead of looking to science to discover the cause of this ill-condition of affairs, we look only to partisan politics, and cry tariff!

The system or principle of convertible debt in currency—the plan of borrowing and lending debt, payable on demand, in the office, or to perform the office, of money, was introduced by and with the Bank of England into commercial finance in 1694. By and for this that bank was founded. Their "capital" was at first no capital; it was a pure sophism. Of their subscribed capital of £1,200,000 they called in 6 per cent, or £72,000, which was pretty much expended in obtaining the charter, the application for which was sharply contested. They paid into the public exchequer the so-called capital, which, by the terms of the charter, was to be loaned to the government. But how did they pay it? Simply by handing into the exchequer the bank notes for £1,200,000—promises to pay money the bank did not possess, in exchange for £1,200,000 of exchequer tallies—promises of the exchequer to pay money the government did not possess, nor ever have possessed to this day, for it was the founding of the present oppressive and irredeemable public debt of the nation. Forthwith they commenced receiving deposits and discounting commercial bills, and with the deposits thus obtained—money lodged with them for safekeeping—they redeemed the notes passed to the exchequer; they did not keep the money, and the government, being thus put in possession of real money in the place of the fictitious, by using the money belonging to the bank depositors, sent the coin under the guidance of Michael Godfrey, the deputy governor of the bank, to Flanders, at that time the seat of the war with France. This coin was employed with great effect at the siege of Namur; the city capitulated on the 29th of August, 1695, after a siege of seven weeks, and the success of the British arms on that occasion was attributed in a great degree to the supplies procured through the operations of the bank, which obtained for the institution immediately a high degree of popularity. The death of the deputy-governor, Godfrey, at the siege, added emphasis to the services of the bank, as he was supposed to have been sacrificed in the performance of his official duty, when in fact he was in the trenches as a courtier, against the remonstrance of the king, who gave him to understand that, as a civilian, he had no business there.

These circumstances, occurring within one year after the bank was fairly in operation, placed it at once so high in popular favor as to disarm all opposition, for before its establishment the coin and the credit of the government were in a very low condition. Thus the directors were enabled to carry their loans to an enormous amount within the next year, in proportion to their cash on hand. On the 4th of December, 1696, the governor and directors of the bank presented at the bar of the House of Commons, in answer to a summons of the House, a statement of their affairs, from which it appeared that they owed £1,975,872 10s. 6d., with only £35,664 Is. lOd. of money on hand; the balance of assets over liabilities, including capital and profits, being £125,315 2s. lid. Their money amounted to only about l¾ per cent of the whole debt.* But they had brought themselves to a suspension of payment as may well be supposed. This was attributed to the recoin-age of silver, but the preposterous loan of debt against debt by the bank was the true cause of the suspension.

We see, therefore, that this system started vigorously into fiction, and with a bad omen, in its infancy.

I use the term debt currency to embrace both the circulating notes and inscribed credits of the banks, less the coin in their coffers. The credits, absurdly called "deposits," when they consist of debt created by the discount of a counter debt, but of course rightly so called when absolute, are as much currency as the circulation.

Currency comprises all the money, and the customary substitutes for money, offered to be exchanged for property of any sort, or to be used in the payment of debt, and in transfers sanctioned or accepted by custom as payment.

Money is value—a commodity—the product of labor. With money we buy property and pay for it, exchanging one value for another without the intervention of debt, upon the principle of barter. In the United States, and in most or all commercial countries, it consists of gold and silver, with a little copper coin, the unit of value here being 25 8/10 grains of gold called a dollar. It pays debt and ends it with value, and then remains, keeping the currency whole to maintain prices and discharge all obligations created by its measure. There is about two hundred millions of dollars of this outside of the hoards, and employed as currency in the whole country. The hoards are money but not currency.

With the debt-currency we buy property by transferring a debt; we pass an order on a bank—the bank then owes for the property instead of ourselves, and promises to pay a value hereafter. Of this we have had over four hundred millions of dollars in excess of the coin in the banks, and in excess of all the money in the country. We shall soon have that amount again. As money or value this is all a fiction—as debt it is reality. It never pays debt without destroying itself—it merely makes transfers while it exists, and when, according to the conventional term, we have paid a debt by passing a note or a check on a bank, there is just as much money needed to cancel debt in the country as before.

I owe $1,000 to Johnson; $1,000 of money will pay and end the debt, leaving the currency entire. Not having the money, I give him an order on the bank; the bank now owes Johnson what I owed him before. The debt is not paid. If the bank discharges its debt by an offset with its creditor, it annihilates so much of the currency. This is simply the contraction of bank loans; it is an absolute destruction of the means of paying the obligations it had itself created in the price of things; the price must fall. This is the important difference between money and debt in the currency. Money remains to support prices and maintain the integrity of obligations after paying and ending debt, because it is value. The debt currency cannot pay and end debt without destroying its sum of currency, because it is not value; it cannot end debt without ending itself, leaving nothing to support prices and meet the obligations created by its measure, and resting upon it for the means of discharge. Like the Kilkenny cats, one debt eats up the other and no value remains. See the wretched effect of this in an illustration.

A trader by industry and frugality acquires $10,000 clear balance at the credit of his stock account, with a certain measure of currency. His assets are $30,000, and he owes $20,000. This is a very favorable average position of a trader in this country. Now, the banks, being obliged to pay their debts, annihilate so much of the currency, as was nearly the case in the fall of 1857, that general prices fall one-half. It is not the sum of the trader's capital merely that falls one-half, but the total of his assets; his debtors cannot pay, and his merchandise falls. He has $20,000 to pay and only $15,000 left to pay with. Instead of being worth $10,000, he is now bankrupt $5,000, without any imprudence or fault of his own, but simply by the miserable instability of this principle of debt in the currency. I know more than one worse case than this in the fall of '57. One is fresh in my mind where a merchant of my acquaintance, worth nearly $200,000, owed less than half the sum of his net estate—a prudent, exemplary man, and an indefatigable worker—he was ruined, and is now in an insane asylum.

We see by these examples that it requires the whole volume of the currency to discharge the obligations contracted by its measure. We cannot fall back upon the money portion of the currency to supply the deficiency of the other, because the money is employed in performing its own functions, in supporting its own share of the public obligations, and in accomplishing the exchanges depending upon it.

It is true that commodities pay for commodities, but the payment by custom and for convenience passes through the medium of currency, and the promise of the currency being to pay dollars, if they are not delivered at the time of the exchange, nothing else will meet that promise when dollars are demanded, let them cost in other commodities what they may. No matter how much money may remain in the currency, the debtor can have no means to obtain it when his means had depended upon prices that have fallen.

At the cost of some repetition I wish to mark accurately the distinction so ill-defined, and so little comprehended by the generality of men, between money and debt, and analyze the debt currency to its primal element or ultimate atom:—

About January 1, 1857, the debt currency of this country consisted of ledger accounts due by the banks and payable in coin on demand $230,351,352
Bank notes $214,778,822
Deduct notes of other banks 28,124,008

In circulation among the people 186,654,814
Due to other banks, liable to check at sight **57,674,333

Total $474,680,499
Deduct coin reported in the banks 58,349,838

Amount of that currency January 1, 1857 $416,330,661

There is some question among thinkers, about the effect of the bank balances as currency, that we need not now discuss.

Of this currency, the most active and effective portion is the credits—the fictitious "deposits." They constitute the medium of exchange of all the large transactions of commerce—of all the stock dealing and stock gambling of New York, and of most of the commercial gambling everywhere. They comprise the "money" so called of the merchants and manufacturers; it is through them, mainly, that the foreign exchanges are turned for or against us; it is their increase, mainly, which raises prices, checks our merchandise exports, increases our merchandise imports, expels our money, and accumulates upon us about ten dollars of unnecessary debt for every dollar of money sent away. The variation usually in the amount of the circulation is comparatively limited—in the inscribed credits it is large and frequent. Some have denied to these credits the character of currency, but the question has been very conclusively settled by this Board of Currency. Call them what we may, they are the most mischievous portion of the mischievous machinery of our currency system, and we are rapidly learning, to our cost, that they are not money, but the worst sort of debt when money is much and generally needed.

Not only has every dollar of these four hundred and sixteen millions driven abroad its equivalent dollar of gold or silver, but every dollar of the same sort created from the introduction of the system into the country in 1782, by the establishment of the Bank of North America at Philadelphia, has done the same thing, whether afterwards "contracted" in the discounts, or sunk in bankruptcy by the failure of banks. The system, from its inception, has done nothing but plunder the country of capital; limit our agriculture and manufactures; cramp our commerce and navigation; entangle us in debt; make spies and informers of us; and demoralize and make us wretched. We carry the marks of its withering touch in our faces; cankering anxiety is stamped there so distinctly that travelers write it in their notebooks, and publish to the world that notwithstanding our boasted liberty and aggregate prosperity, we are slaves to care and an unhappy people. We are prematurely old; we see it in the mirror, and acknowledge it ourselves. All this comes of living in debt and difficulty, while the unrighteous system scatters our money over the face of the earth as fast as it is earned, sinking us in bankruptcy individually at last. At the same time the labor we perform produces an unparalleled degree of wealth collectively, that too often enures to the cunning, who win, and not to the honest, who earn it. There never was a country so full of the elements of material prosperity as these United States—with a better and more varied climate; so much strong, virgin soil; so many intelligent laborers; and so few non-producing consumers, in proportion to population. Against all these advantages, to which we owe the rapid accumulation of our national wealth, we legislate our property, through a vicious banking system, out of the hands of its rightful possessor into those of the lucky capitalist, who, at the next turn of the screw, is frequently stripped of his property for the benefit of another, who happens to be the capitalist of the day.

No community, having an open commerce, can possibly maintain, permanently, a volume of currency greater than another, in relation to commodities, for the value of money is measured and determined by commodities, as the price of commodities is measured and determined by money. That which is the cheaper, the money or the commodity, will immediately pass to the dearer market. This law was discovered and demonstrated by Adam Smith, and is one of the best established in the whole science of political economy. Its operation is familiarly known to every merchant in the course of exchange, which immediately turns against the city or country having any comparative excess of currency, if it be convertible into money. A difference of one-fourth of 1 per cent will at any time send money from Boston to New York, or from New York to London. This simple and undeviating law condemns our banking system at a glance. But our merchants ignore this law; they say we send gold because we are in debt to London. How came we in debt to London, but for the reason that commodities are worth more here, which is only another mode of saying that money is worth less here, and more there? We cheapen our money, and commerce, acting with the promptitude and certainty that characterize all natural law, brings commodities to our dearer market, putting the balance of account against us. We might as well attempt by act of Congress to turn the current of the Mississippi back from its mouth to its source, as to think of checking the import of foreign goods by a tariff, or any other human statute, when the aggregate of our active currency exceeds even by one-fourth of 1 per cent its natural specie volume. Commerce will find it out when no individual can discover it, and its exponent is one-fourth of 1 per cent exchange against us—that is all.

I have, in former papers, assumed $400,000,000 as the sum of our debt currency; that was the average from July, 1856, to July, 1857, and, as I have stated here, it will soon amount to that sum again. Now the consequence of the existence of this amount of debt in the currency was, and will be, the co-existence of $4,000,000,000 of debt in the country, wholly unnecessary; destructive of the best interests and happiness of the people; the result of gross ignorance or neglect of the science of commercial finance, or political economy; restraining our natural production and traffic, and thoroughly absurd.

This may seem startling to those who have never reflected upon the subject, but it is none the less true. It will surprise no one who reflects upon the number of exchanges necessary to the circulation of all the commodities of our commerce, that, from the absence of money and the necessity of providing notes for discount, to keep this debt currency alive, must be made on debt and credit. So thoroughly does this system permeate and poison our business, that almost everything in country or town, from the supplies of the butcher and baker to the Calcutta cargo, must be sold on credit, the great want of currency being to pay a debt previously contracted, and then what we call paying is only transferring. For what I owe the baker I hand him a bank note—value is absent; the debt is not paid. What I owed the baker yesterday the bank owes him to-day; and as to the Calcutta cargo, the way I pay the note I gave for it, and which my creditor has had discounted, is to sell for a note, and get that discounted, paying debt with debt. It is the round of eternity. The ultimate debt can be paid only as we pay the debt of nature—by death. Value, the vital principle, is absent. The whole structure of obligations, over and above the true measure of value of a money currency, is but the baseless fabric of a vision, that, on the first demand of value, dissolves, but leaves many a rack behind.

It is a startling fact yet to be investigated by scientific men, that if, by an exchange of obligations merely, we establish one dollar of debt in excess of the coin in the currency, it will become as much the price of a thing as if it were a value—an additional dollar of gold; and that price never can be paid. The obligation rests upon the thing it is made of—moonshine—moonshine must sustain, and moonshine alone must pay it. It may be exchanged and kited, while the debt currency continues at its full inflation; that is, while it exists in price. But it is an obligation to pay a value that never was and never can be, for every value brings a coexisting obligation into being with it. If it be a dollar it will pay a dollar; obviously it cannot pay two at once. Therefore it is that the obligation to pay a dollar of value in the currency, that never was created, is an obligation impossible to be fulfilled. No doubt we may create and keep in circulation numerous obligations to pay a Kohinoor diamond, so long as the fallacy lasts in public opinion that they are as good as the diamond itself, because the diamond may be obtained on demand for each promise to pay, but there is only one such diamond in the world, and when the demand of one creditor for the diamond, the real value, is satisfied, and he chooses to retain the jewel, what is to become of the remaining promises to pay, for which no Kohinoor diamond, or its equivalent value, ever existed? This is the absurdity of our system; the bank contracts to deliver a specific thing; when an exchange of contracts, or promises, will not answer the purpose of creditors, and the demand is made upon the bank for the specific dollar which it never loaned and that never was created, we are plainly cornered. We have become so accustomed to the idea that an equivalent will always procure the dollar, men fail to discover that there is no equivalent to fiction but fiction.

But this is not all. Whatever may be the relative activity of the circulation of money and property becomes the measure of the number of obligations that must rest upon the fictitious dollar. I think that relative activity is as 10 to 1, and I was gratified to find my opinion confirmed by one of the most experienced financiers in this country, the late Mr. George Newbold, President of the Bank of America. I deem this matter of relative circulation so important, and Mr. Newbold's testimony so valuable in establishing the truth of my proposition, that I venture to call a witness and refer to Mr. George D. Lyman, Manager of the Clearinghouse, who was present with us in that conversation about three weeks before Mr. Newbold's death. It was then Mr. Newbold's opinion and mine, in which Mr. Lyman concurred, that every dollar of money or currency exchanges in its circuit, on the average, ten dollars of property. Of course this estimate must be approximate only, depending upon the average number of transfers from the producer, or from the imported raw material, to the consumer, which is believed to be five; of course the return transfers would be five, making ten in all to complete the circuit. Assuming this estimate to be correct, it follows that every dollar of the currency curtailed to reduce its volume to the measure of value, and stop the outflowing of specie, will infallibly leave ten dollars of obligations without any means of payment. Debtors must break in that ratio. By the operation of the law of value the contraction must take place, and continue until the currency is reduced to its natural volume; that is, to the same amount as it would be in gold and silver, if there were no debt in the currency. Then the excess, which was before mere price, a degradation of the value of money, having cost us good gold for its whole amount, by driving it out of the country, becomes a substitution of debt for money in the currency, fills the exact measure of the expelled coin, and occupies its place. To reach this natural and inevitable position of value, the price created by the fiction of money falls from the commodities to which it adhered like a fungus; it was not value—it was disease, and did not belong there, and yet that diseased price comprised the total of means to meet the obligation created by the false measure; it sloughs off in the cure by the effort of nature, as—

She cures decrepit flesh,
And brings it infantile and fresh.

It sinks, and all its obligations, running to maturity, sink with it. They can never be paid, and the coin is totally lost by its degraded value, not a dime of value being returned for it. This is philosophic truth.

I suppose this to be my discovery. At any rate I shall hold the patent till someone puts in a prior claim and makes it valid. I have not found it in the economists. Mr. Calhoun came nearest to it in his speech on the recharter of the United States Bank in March, 1834, and Mr. Gouge makes suggestions leaning the same way, but I believe the absolute philosophic fact that price created without value, by converting debt into currency, must end in the bankruptcy of all its obligations, and with the total loss of the expelled coin, is my patent. This, in my opinion, fully explains the distressing crisis of 1857, and all the revulsions that have occurred since this iniquitous principle was introduced with the Bank of England into commercial finance in 1694; and it ought to form the basis of vigorous legislation by the Congress of the United States.

Can anybody fail to discover the wide difference between the product of labor in gold placed in the currency, with its resulting price in commodities, and the product of a banker's pen in a promise produced by writing another promise against it, with the price this fiction will create? If this latter were value, the wealth of the Indies would be attainable without labor and without cost.

Now, to apply this principle to our financial affairs in the autumn of 1857. We had in August of that year, a debt currency over and above the money in the country of $416,000,000; money, including the coin in banks and not in hoards, $200,000,000; total of currency in August, 1857, $616,000,000.

The portion of specie in the banks is, or may be considered, active, because its ownership circulates in the bank notes and credits. So far the bank debt is properly money, circulating with more portableness and facility than the coin, without abrasion, and without cost of transportation. There was about fifty-five millions in the banks, and one hundred and forty-five millions in the government treasury and in hands of the people, in August, 1857, of real money. Specie is the more sluggish portion of the currency, varying from the activity of the bank circulation, the small change in all the States, and of the money in the few States that have suppressed the notes below $5, to the sluggishness of the stocking deposit of the Dutch farmer and the confines of the hoard. Still, I think, there may have been $200,000,000 operative more or less as currency, much being among the immigrants in the West. The hoards, I think, cannot have amounted to much, but I will not attempt to estimate them, as they have no effect upon prices, or upon the currency or commerce of the country.

It is obviously one of the first effects of a financial crisis to alarm the owners of money; they call in their loans and the hoards temporarily increase. We may be sure, therefore, that there was no increase of specie in the currency from August, when the banks commenced the curtailment of the debt currency, till October, when they suspended payment, and we shall certainly be within bounds to estimate the curtailment upon the bank contraction for the whole currency.

The debt currency on the 1st January, 1858, was as follows-inscribed ledger credits called deposits $185,932,049
Bank notes $155,208,344
Deduct notes of other banks 22,497,436

132,710,908
Due to banks, liable to check at sight 51,169,875

Total $369,812,832
Deduct coin reported in the banks $74,412,832

Total of debt currency January 1, 1858 $295,400,000

There had been a material revival and addition to the credit inscriptions, between the middle of October and the 1st of January. In New York City alone the increase amounted to nearly $20,000,000 from the date of suspension, 14th October, 1857, but this was a gain of specie from the rest of the country. There can be no doubt, however, that the debt currency, which amounted in the middle of August to $416,000,000, had fallen by the middle of October to $295,000,000; contraction in two months $121,000,000.

Now, I am well satisfied that this contraction plunged into bankruptcy or suspended payment among the debts of the whole country far and wide, and large and small, the enormous amount of twelve hundred and ten millions of dollars. No doubt this will seem incredible to those who have not investigated this matter, but a little reflection will make it plain. If the price embodied in a barrel of flour averaging $6.00 circulates ten times through our currency system, as I have assumed and think approximately correct, then that which six dollars of money would have paid for at the outset creates sixty dollars of debt. It is not at the barrel of flour itself in market that this operation commences, but back to the seed of the wheat sown by the Western producer. He bought the seed on credit, perhaps, and the product of the harvest passes through its various exchanges on credit, or by the medium of the bank debt which a counter debt must accompany to keep the bank alive, from producer to dealer and miller—then in flour to dealer after dealer until it reaches my grocer who sells it to me on 6 months' credit. During its travels from west to east it will pass through bank discounts and be represented by red-dog and wildcat without perhaps the aid of any money at all; it may have been the means of creating a debt at every remove, and now, having brought me in debt, I must pay for it; and how? Why, I sell an ox hide to a dealer or a tanner for a six months' note, get the note discounted, and pay my grocer by transferring the debt from myself upon the bank, and now the hide must find its way back in sole leather and upper leather, by tanner and currier, and shoe manufacturer and dealer after dealer, through debt and discount many times repeated, to the planter of the West. At length the circuit is completed—the dollar of currency has gone its round, and what is accomplished? Simply this: I and my family are eating up the farmer's wheat, and he and his family are consuming my ox hide in the shoes upon their feet. It was not convenient for him to come to me with his wheat, nor for me to go to him with my ox hide; hence the numerous exchanges through debt to fulfill the infallible law that commodities pay for commodities. I have simply bartered with him an ox hide for five bushels of wheat comprised in a barrel of flour.

This, with some latitude of expression, may be called the orbital motion of currency, bearing a relation to the daily exchanges it accomplishes similar to the annual motion of the earth in relation to its rotary or diurnal motion. In its circuit it performs various exchanges of different commodities, which we assume to be in the ratio of $10 of property to $1 of currency.

We must remember that commodities pay for commodities; money is merely an instrument of transfer in effecting the exchange, and is never a finality, unless with the miser or the monomaniac. It is wholly immaterial what may be the volume of the currency if it be left to the operation of the natural law of value, for one-half the currency at present employed in this country would serve to transact the same business—would exchange equally well the same quantity of property, and the same value, only at one-half the price, as the whole sum exchanges now. But we could not keep it so; exchange on England would be fifty per cent below the true par; fifty cents would buy as much here as a dollar elsewhere. Obviously, the business of the country would spring into immense activity at once. Everything we could sell and produce would be demanded for export, and everybody would make money on the advancing prices, until we had sold commodities and imported money to the equation of international demand for both money and commodities. The exchange of commodities can, of course, be effected without money, and it is so effected when it is done by a promise to pay, whether that promise be pictured in a bank note, inscribed in a bank ledger, or passed by word of mouth from the producer through every remove; but, as money is capital and debt is not, and a certain proportion of currency is needful to facilitate business—money, the only description of currency that can be employed to effect exchanges without debt and embarrassment, is profitable to import. I do not overlook the fact that there are numerous exchanges made by direct barter of commodities without the intervention of currency or debt. Everyone will perceive that there is no capital in our debt currency of 400 millions of dollars; whatever may be its value to individuals, it must be left out of the account in estimating the aggregate wealth of the country; if it were to be annihilated tomorrow the capital of the country would not be reduced at all, but one man would gain what another would lose. If, however, the 200 millions of money were annihilated, a different result would follow—it would be an absolute loss of wealth to the nation.

I see no difficulty in finding tenfold the price of the flour added to the debt of the country by the operation I have detailed, which might have been prevented with profit by selling an extra barrel of flour for cash, and using the gold. Our wheat farmers will not long be in need of credit to any great extent when the policy of retaining and importing gold to form our currency shall prevail. It is what everybody desires, but what, by sustaining our present system, they blindly prevent—the selling of goods for cash.

But there is another method of reaching the same result, with respect to the enormous amount of bankruptcy in the autumn of 1857. Bad debts are never pleasant things to talk about; people disguise them if they can, and the amount falling among the traders of the interior, small in items but vast in aggregate, we never hear of. If the occasion had not been so full of sorrow, I should have been amused at the effort of the Independent to keep its bankrupt list veracious as the contraction progressed in 1857. It came at last to counting sands on the seashore, and they gave it up in despair. There was also, however, another reason for this. It was found by dear-bought experience that the publication of failures stopped the collections of the unfortunate creditors. This fact came home to the proprietor of the Independent in a practical and painful manner at last, and is said to have had much influence in putting a stop to the publication of the bankrupt list. The most reliable method of acquiring information on the point we are considering is to estimate upon general principles.

It is approximately correct, I think, and I have the estimate of the late J. C. Calhoun and others to confirm my opinion, that the currency in a commercial country like ours, which should be money, is as 1 to 25 of the whole property. In round numbers, then, with six hundred millions of currency we have fifteen thousand millions of property in and out of market.

It is an estimate of some economists that about half the capital of commercial countries is reproduced every year, and that half is nearly all consumed in the same year.*** I am of opinion, in which I have good supporters, that we in this country add about five per cent of this reproduction of seven thousand five hundred millions to our capital annually, namely, three hundred and seventy-five millions, and the remainder of forty-five per cent is annually consumed. Now, in producing and consuming this immense amount, two-thirds of which at least must be exchanged with debt, that is, five thousand millions, because we have no money to exchange this portion with, according to the proportion of our currency, is it at all unreasonable to suppose that twelve hundred and ten millions of obligations, or about one-fourth of the amount exchanged through debt and credit, fell into bankruptcy or was stopped in payment in the unparalleled revulsion of 1857? I think not.

In confirmation of the estimate of the ratio of 1 to 25 of currency to property, I find Secretary Guthrie estimated the value of the whole property of the United States in 1855 at $11,317,611,000. As the currency then stood it was not far from the same ratio of 1 to 25, but the estimate was a little too low, as he thought himself. I am so well satisfied with this ratio, after careful reflection, that if I would estimate the money value or price of the whole property of this country, I would first ascertain the volume of the currency—then multiply it by 25, and I would have a result more satisfactory than could be furnished by the most elaborate statistics otherwise prepared. It may be interesting to observe that an increase of $375,000,000 yearly, with the present value of the precious metals, would double our property in 20 years, but as each year's increase will produce its addition of 5 per cent, upon the principle of compound interest, we may upon this calculation expect our property to double in 15 years, even with our present population.

And in regard to the estimate of the relative activity of the circulation of currency and property as 10 to 1, it would seem to be confirmed by the ratio of failure to success in business in this country, according to the investigations of the late General H. S. Dearborn, of Massachusetts, who several years ago collected statistics relating to the matter. He concluded that about 95 of every 100 traders, great and small, fail once in life or die insolvent. The bankruptcy of 10 to 1 in trade would be the inevitable result of the bankruptcy principle of $10 to $1 in the currency, in its average operation.

Moreover, 10 of immediate liabilities to 1 of specie is the utmost point of inflation that is reached by the banks of any portion of the country by combined action. The New England banks combined, usually maintain this degree of expansion. There are weak districts included in the average that exceed it by leaning upon their neighbors; the Rhode Island banks, for example, often run down, by resting upon Boston and New York, to $4.50 of coin to $100 of immediate liabilities. They owed the Suffolk Bank in Boston $700,000 at the general suspension in the fall of 1857, which they could not adjust till the present re-inflation had made considerable progress, and their notes were for several months at 15 per cent below par in Boston and New York. But it would seem that the New England banks, altogether, find 10 to 1 the outside limit of safety.

There are four essential points to be impressed upon the public mind in relation to our subject.

1st. That money and debt are antagonists by an irrepealable law; like fire and water in contact, one must expel or extinguish the other. To whatever extent we employ one of these in the currency, the other must leave; they cannot occupy the same space at the same time. Certificates of the ownership of coin, and the coin for the same, cannot be issued and employed as currency, and kept in the country together; we cannot eat our cake and have it too.

2d. And not less important is the one I have just endeavored to demonstrate, that debt, when converted into currency, creates price without value, which cannot be maintained, and obligations that can never be paid in the approximate ratio of 10 to 1 of the curtailment of the bank currency, when the curtailment is not replaced by specie, because value is necessary to discharge an obligation payable in value. The price must vanish with the currency that created it.

3d. There is a sharp distinction between value and price to be inculcated, by which people may be brought to see that whenever prices rise from an increase of currency there is no increase of value or wealth, but a fall in the value of money which checks home production and the export trade. Such fall in value must be calculated on the whole currency. Assuming the natural volume of our currency to be six hundred millions of dollars, an increase of one per cent of currency would be a fall in its value of six millions of dollars, and inevitably cause the export of gold and silver instead of merchandise to that amount, and if the increase be made by adding convertible bank debt to the currency, six millions of the capital of the country is totally lost thereby; it might as well be plunged into the sea. The most unprofitable business for any community is to manufacture currency, for its increase is exactly balanced by the degradation of its value. In the case supposed, 101 dollars, after the increase, will buy no more than 100 dollars bought before. Even to produce gold, as in California, is a poor business, for the constant cheapening of money thereby must keep the community there almost constantly in trouble with a glut of imports attracted by the high prices caused by cheap gold.

4th. The rate of interest is the indicator of the abnormal condition of the currency, showing the preponderance of debt in relation to the money it contains. Interest has nothing to do with the value of money, except that it is always high when the value of money is low. Debt in the currency has more effect in raising the rate of interest than debt anywhere else. It creates an increased want of money and capital by driving capital in money away. It is no capital itself, but a mortgage upon capital. As currency of that description increases, a divergence proceeds between the money and debt of the people; the rate of interest always rises of course, and, except in the frenzy of the change, as such currency decreases, the rate of interest falls. A rate of guaranty for the risk of bad debts, inseparable from the debt currency system, is always included in the rent of capital.

These are facts of great significance; they ought to be carefully investigated and widely published, that every man capable of mental exercise may investigate them for himself. They are philosophic truths, I believe, fully proven by experience, and nowhere else so distinctly marked as in this country, especially since the influx of gold from California furnished so wide a basis of bank inflation. The absurdity of our system is particularly manifest in the fact that the more gold we produce the more we have of debt, difficulty, and distress, and the higher is the rate of interest.

I have been asked why we may not keep our currency as it is, with debt incorporated therein, provided we can restrict its volume so as to keep it as valuable as the currencies of other commercial countries, which would prevent the export of specie. I reply, for the simple reason that every dollar of debt occupying the place of money in the currency obstructs the business of the country—prevents the production and export of precisely the same amount of our domestic merchandise, and leaves us in the unnecessary involvement of ten dollars of debt that may not be paid. There is no compromising a principle. We must have either money or debt in the currency. If we have money we have no debt; if debt, we have tenfold the same sum of debt in our exchanges; and the debt currency causes the absence of productive capital for its whole amount.

Another fact of momentous importance is that the sales on credit are made with a charge included for guaranty against bad debts, which with a specie currency would be saved. It is believed, as I have before stated, that commodities pass through five removes at wholesale and retail from producer to consumer, on the average, with an average charge of four per cent in each sale to cover this abnormal risk, so that articles reach consumers burdened with an extra and unnecessary cost of twenty per cent. This must be embodied in the cost of exportable commodities, and becomes an immense obstruction to our export trade. It is the fund upon which bankrupts are supported, and many a spendthrift and vagabond takes cover under their mantle of misfortune. This is another power of expulsion to our gold, checking the progress of the country in wealth. It falls on the producers in two ways, for it checks their production and sales, and then compels them to feed and clothe great numbers often without their knowledge or consent. Obviously this evil is not removed while debt remains in the currency, whether its volume be above or below the specie measure.

In France the debt currency makes but an indifferent progress since the wild patriotism of the revolution was gorged with the paper assignats and mandats. And French history, as well as many a family tradition, furnishes illustrative lessons from the paper exploitering of John Law with convertible currency in the early part of the last century. Charmed with the Bank of England, Law saw no reason why the whole fixed property of France should not be coined into paper currency, and he undertook little less than that magnificent exploit. In principle he was as right as the Bank of England; the whole can be paid as well as the part; the difficulty is that when it is made it must ruin somebody until it expels and occupies the precise place or rather volume of the expelled gold and silver, as it has done in England and here. But Law, with the help of French enthusiasm, extended the scale of its operations until its magnificence was seen and felt more distinctly in France than anywhere else. It worked there beautifully, as it does everywhere, until money was demanded for the bank debt; then the difficulty of balancing a promise with anything but the promise against which it was created, became as apparent in France as it was here in the autumn of 1857. On Law's grand scale it became quite obvious that the nation could not furnish a value or the equivalent of a value that never existed; and when the attempt was made to perform this impossibility, in the enthusiastic style in which the French do everything, ruin fell upon many of the best families and fortunes of France, and general bankruptcy and distress upon the nation.

The French have never liked the business since, and the sum of the debt currency of their empire rarely exceeds very much one hundred and ten millions of dollars; it was one hundred millions at the last accounts, exclusive, of course, of the specie in the Bank of France, which we all know is her only debt bank of issue; while the coin in France now exceeds one thousand millions of dollars.

The French, ever since the revolution, have kept money more valuable than any other nation of Europe. A note of the bank is seldom seen outside the large cities—the people do not believe in it; they are not in debt in the interior, and of course their business is done for cash, for they have plenty of money. France is now immensely opulent. If she but cultivated the arts of peace as she cultivates the art of war, I think she would subsidize all Europe with her policy of keeping her money and selling her merchandise. And what wars she has sustained, and what immense subsidies she has paid to foreign powers! The enormous sum of $307,500,000 was extorted from her by the allies for the expenses of the war which ended with the final subjugation of Napoleon, and 150,000 of the allied troops were quartered upon her for three to five years besides. It is astonishing that the example of France in commercial finance does not strike the minds of our commercial financiers.

I have a worthy friend, an old and accomplished gentleman, and a fine writer and thinker on political economy withal, who lived 15 years—1794 to 1809—in Morlaix, a French town on the British channel, having an active commercial intercourse with Spain, Portugal, and South America. It is a town of about fifteen thousand inhabitants. He says he never saw a bank note there, and not a failure occurred there while he was in the place. When shall we be able to say as much of any trading town of the same size in this country or in England? My friend says he found the use of coin for change much more agreeable than our small bank notes, and quite as convenient, and when an operation in money required more than his pocket expenses, he checked on his banker, and his banker made all his transfers. The bugbear of carrying gold and silver about is put forward here by men of decent intelligence in support of the present banking system, who ought to be ashamed of such nonsense.

Thus it is; France, with an indifferent agriculture compared with ours in most parts of the country—Wendell Phillips says in many parts of France and Italy the plow is unknown—with a population not superior to ours in physical strength, and decidedly inferior in education, intelligence, and inventive genius—with a most extravagant government—great army and great navy always, and frequently great wars; with a power of unproductive consumption that one would think should stop her advance, is vastly richer than we, and she is taking the most immense strides in opulence of any nation in Europe, simply by keeping her money worth more than her merchandise—keeping down the debt currency, notwithstanding many members of the government and any number of speculators want to increase it. But the good sense and wholesome recollections of the people have thus far prevailed, and the operations of the Bank of France in manufacturing currency are limited to Paris and a few only of the other large cities.

It is well known that almost every French cultivator, mechanic or trader, has a bag of coin always on hand, and it is the almost universal use of coin among the people that enables the government to collect the taxes with so much facility. They have no occasion to resort to debt and discount to pay bills of any kind.

Next to France, Holland has probably the most unadulterated currency in Europe, and we all know how almost entirely unscathed both these nations passed through the late commercial revulsion, notwithstanding heavy losses fell upon some of their merchants from the defalcations in this country and in England. Shall we forever ignore such manifest proofs of the superiority of a money currency?


It is proper for me to say in conclusion, and in addition to the matter presented to the Board of Currency, that I make no objection whatever to the "credit system," properly so called, either in the ordinary traffic of the country or in banking. I know the value and necessity of credit to young men without capital who have good heads, strong arms, and willing hearts, and it is precisely such men who would obtain credit and profit by it under the stable value of a sound currency system. If they get a value for each obligation they issue, it is all right; if they borrow promises to pay half a dozen Kohinoor diamonds, or any other value that was never created, it is all wrong. Let the banks borrow and lend money as individuals borrow and lend money or merchandise, and I have no objection to credit banking, a very different thing from debt banking. Then they would employ their credit in obtaining money at an existing value and at a low rate of interest, and they would lend no fiction; they would lend an existing value as they would rent a house, at a profit for the rent of capital. Now they lend evidences of debt for a multitude of ounces or dollars of the precious metals that they never possessed and never borrowed, issuing numerous promises to pay a specific thing that never existed; when the pinch comes they demand that specific thing of their debtors, and holding the best securities—evidences of values transferred and well indorsed—they corner almost all the traders in the country, and sometimes corner themselves by demanding and failing to receive a value in exchange for a fiction.

This is debt banking—the system of the Bank of England. It costs this country on the average about $50,000,000 yearly of solid capital in gold and silver, and an untold amount of wretchedness in the dissipation of the hard-earned fortunes of worthy and industrious men. It throws the intelligent and unequaled industry of this country into all the hazard of a game of chance. Without the least hostility to those engaged in the business, who are as much deluded by it as any other members of the community, I protest against the system. It needs investigation, sound thinking, and plain speaking, free from political bias and chronic prejudice, and the remedy lies in honest, unchartered, unequivocal credit bullion banking.



*They had borrowed £300,000 from Holland, and made an arrangement with a portion of their creditors by which the payment of their claims was postponed, and bills for £93,800 were sealed up, bearing interest at the rate of 4 per cent per annum; they also owed £17,876 for interest on the sealed bills, so that their demand liabilities were £764,196 10s. 6d., against £35,664 Is. lOd. of money on hand. There were no accounts current, or what we call "deposits," on their books.

**With regard to the bank balances-debit and credit-there seems to be no more reason why one side should be deducted from the other in estimating the currency, than that the same plan should be pursued with the individual accounts. The bank lends A's "deposit" to B, both parties having the right to check upon their accounts, and there are thus two "deposits" of the same specific sum; in fact, both are checking on the same dollar. By averaging accounts with other balances for the day, this thing can be done in easy times, and it can be more than once repeated; but all these balances are currency at rest, waiting investment in commodities, as commodities in store are merchandise at rest, waiting investment in currency, 10 to 1 of the amount. The balance due by B cannot be deducted from the balance due to A, because the bank is liable for both in coin on demand. Both have the same purchasing power as coin in the market, and affect prices the same; both are embraced in the loans. So with the bank balances, those due from banks are loans, and those due to banks are "deposits," and therefore currency. The whole system of debt banking is a balance of debt against credit of this nature. The balances due from the Rhode Island banks to the Suffolk, of Boston, for example, is a loan from the Suffolk; with the Rhode Island banks it is a "deposit." This same sum the Suffolk borrows on its circulation and credits, or perhaps from the Metropolitan Bank, of New York; it is all the same in either case; and if borrowed from the Metropolitan, it is a loan from that bank, and in the Suffolk it is a "deposit" due to the Metropolitan, and liable to check at sight, having the same purchasing power, and the same effect upon prices, as coin in my pocket that I may use to-day, or next week, or next year. It is therefore currency.

***This estimate of production would seem to be too high for many of the old countries; particularly for those often engaged in war, or generally in the maintain-ance of large armaments, and in the support of extensive privileged and idle classes, and an extravagant government; but I think it may not be too large for the United States, where unproductive labor and unproductive consumption are more limited than in any other country.


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