Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
Table of Contents
Bankruptcy in the Currency
(Reprinted from Hunt's Merchants' Magazine and Commercial Review
, XL (June, 1859),
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
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
|Deduct notes of other banks
|In circulation among the people
|Due to other banks, liable to check at sight
|Deduct coin reported in the banks
|Amount of that currency January 1, 1857
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
|Deduct notes of other banks
|Due to banks, liable to check at sight
|Deduct coin reported in the banks
|Total of debt currency January 1, 1858
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
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
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
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
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.
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
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