Ludwig von Mises Institute

Chapter 16
Congressional Movement in the Currency Question

The greatest encouragement of trade, and the greatest hope for the general welfare of these United States, may be found in the present indications that Congress design to attend to the long neglected duty of controlling the currency of the nation. The Senate, it appears, is engaged in an effort to stop the circulation of bank notes in the District of Columbia, and Mr. Etheridge, of Tennessee, has presented a bill in the House of Representatives to provide for uniformity in the value of currency notes throughout the United States.

But this uniformity of value, let me say, cannot be obtained or secured by operating merely upon the bank notes, which are simple emanations from the "deposits," very much inferior in power and consequence thereto, but nevertheless, the same in nature and effect. It is to the constructive or theoretical "deposit," that legislation must be applied to be of any use whatever in regulating the value of money. In the matter of deposits, from which the bank bills and checks proceed, the banks, with the exception of a relatively insignificant sum of money—that is, of coin—make as they go; they lend nothing but promises, and receive nothing but promises in exchange therefor; the whole is a mere exchange of debt; the deposit is made out of nothing as to capital or value, because their liabilities are increased equally with the assets; whereas, if they loaned money, either their own or borrowed, there would be no increase of liabilities or assets in their loans; they would lend actual and pre-existing capital; it would be merely the loan of a value to be returned at the maturity of the discounted note, and no increase of the currency or of price, and, therefore, no degradation of the value of money. The difference is wide; it is between lending something and nothing.

Take one from one and nothing remains; so much is the money, capital, and value in the constructive deposit. But as soon as the deposit is created it becomes currency, and afterwards it is wholly immaterial whether it circulates in checks or bank bills, their nature and effect being the same; this is perfectly obvious and needs no further explanation. Yet this simple fact appears to be almost entirely overlooked in England, and legislation there for restricting the bank currency is applied solely to the bank notes. The bank charter act of 1844 has no other direction, and it amounts to nothing, for this cause, except that the suspension of the specie clause acts as a sort of mesmeric influence or power of the imagination; the patient imagines he feels better, and so he does feel better. It is the old story of the Frenchman who, having loaned a sum of money, and a financial pressure following, becomes concerned for the solvency of his debtor; forthwith he demands his money, but, finding his debtor in good condition, with plenty of money in bank, he says:—"Ah! if you have de money I do not want it." The limit of the issue of notes is beyond the sum required for circulation, until the deposits become reduced by the inevitable pressure, which is the consequence of the fallacious system of creating theoretical or constructive deposits; then, as the crisis reaches the culminating point, the cry is, "Suspend the restrictive clause and all will be well"; the clause is suspended, and nobody wants the notes. This is what is called the restoration of confidence; the confidence is misplaced which precedes the doubt, and we, in this country, ought to secure a system of banking and currency in which confidence can never be shaken. We have accepted our system unquestioned from England, and have tolerated it too long.

On a tolerably careful examination of Hansard's Parliamentary Debates, I do not find that any member reported in them understood the fictitious character of the deposit very clearly, excepting, perhaps, Mr. Hume, who, in the debates on the commercial distress in November, 1847, said in substance:—"The bank pretends to discount bills for bankers and merchants when it has not a shilling to do it with. The whole difficulty arises from having the bank founded on a wrong principle." But he does not show explicitly how this pretentious discount operates; this, I think, is better understood in this country than in England.

The "deposit," as I have already said, is created by the discount; it is not drawn from pre-existing funds, as most persons suppose; it is, of course, no deposit at all, but is an inscribed credit for money and capital having no existence. All the directors look at, in making the discount, is the specie they have, or can count upon from near sources, to meet their near liabilities. The deposit thus formed becomes currency equal in purchasing power to gold, and a clear addition of the element of price over and above all the value, capital, and money in the world. The price thus created is destitute of value, and is a mere degradation of the value of all previously existing money; local at first, but as the circulation of this "deposit," or its progeny of bank bills, extends, the degradation becomes general over the whole country, and, expelling coin as it proceeds, ultimately degrades the value of the money of the world, precisely as much as it adds to the volume of the world's currency.

Jean Baptiste Say, alluding to the decline in the value of the material of money, remarks:—"If the value of its material have declined, the nation will have lost upon its capital, existing under the form of money, just in the same way as a merchant would lose upon the fall of price of goods in his warehouse." And this is the result of our theoretical convertible "deposit"; it sinks the value of money precisely as much as if so much new gold were mined and added to the currency, and we lose the specie expelled thereby utterly. If we produced or procured the additional gold, the increased volume of money would make good the reduced value, and the nation would stand in aggregate capital and wealth just as before; but we get no capital or wealth in this "deposit"; we merely make it up in debt among ourselves, and when the gold is gone, we have nothing but debt to show for it; it goes off in the inflated price at which we retain our own products and buy those of other countries.

Now, this price, which is not value, never can be paid; the thing is impossible, for no such thing exists in value. We might as well enter into mutual obligations to deliver the dog star. True, the two original contracting parties, if they could keep their obligations out of the hands of a third person, might re-exchange promises, make a set-off, and settle up; but as this fictitious price is currency, it circulates its obligations through all the exchanges of property that would otherwise be made with money. I see no reason to alter the opinion I have expressed before in your pages, that this circulation in the exchanges averages 10 to 1; each dollar passing through ten hands or ten removals, in completing its circuit. If I am right, there must be ten dollars of debt resting upon the original bank dollar of price, that, when the bank withdraws the fictitious dollar in the curtailment of its loans, will inevitably sink in bankruptcy. No matter, however, what may be the proportion; of the principle I am sure; the wealth of the world cannot immediately furnish a thing that never existed, and all debtors under obligations to deliver it, when settling day comes round, of course must break.

The fallacy, therefore, and vice of our system, which is the Bank of England system, is in the fictitious, theoretical "deposit," which has no existence in value. These deposits, as they increase the currency, destroy the value of money dollar for dollar of their amount, and send abroad our gold for nothing, planting themselves in its place in the currency, and at the same time preventing the production and export of other commodities instead of gold. They impair the obligation of contracts, sink us in bankruptcy, and cripple our commerce continually.

There presses upon the bosom of our commerce to-day an incubus of probably 420 million dollars of this fictitious, theoretical currency—the returns not being completed at Washington, the exact amount is not known*—and yet, the whole volume of the currency does not now exceed the specie measure, for the exchanges of the world are in our favor. We could now, by reducing the bank debt currency as fast as the California gold arrives, secure the export of that additional amount of our other exportable products, without the slightest fall of general prices, or derangement of trade, and we could soon put 420 millions of absolute money capital in place of the 420 millions of the fictitious currency which expels so much money, and prevents so much traffic, and this sum would be permanently added to the capital and wealth of the nation.

This amount of the debt currency having now nearly or quite performed its evil mission of bankruptcy, and got itself fairly planted within the natural specie volume, there could be no more failing in bringing this thing about, except of such obligations as are still being renewed and running to maturity contracted on the more expanded volume of the currency and above the specie measure when the rate of exchange was against us.

Now, for the moment, our general exports are increasing fast, but these will soon be checked if our banks increase their loans, or even if they do not reduce them, because of the continued arrival of the California gold. We are liable also to a check from the contraction of the currency in England, which is already taking effect upon our foreign exchanges.

I consider the control of the common medium of exchange of the nation—the great wheel of circulation—as the chief function of sovereignty; without it the nation can never regulate its commerce, nor the value of money, nor command its resources for the common defence or the general welfare; all which is amply provided for in the Constitution of the United States, both in its powers and limitations, thus:—

Congress shall have power—

To pay the debts and provide for the common defence and general welfare of the United States.

To regulate commerce with foreign nations, and among the several States, and with the Indian tribes.

To coin money, regulate the value thereof, and of foreign coin.

To make all laws which shall be necessary and proper for carrying into execution the foregoing powers.

No State shall coin money, emit bills of credit, make anything but gold and silver coin a tender in payment of debts, or pass any law impairing the obligation of contracts.

This last prohibition I believe to be the most important provision, and it is most essentially violated by the constant tinkering of the currency by the States. I care not for the legal quibble that the nominal amount of the contract is not altered; the means of payment of every debtor are rapidly altered by the constant change in the value of money, caused by the expansion and contraction of the discounts, and the consequent increase and decrease of the fictitious "deposits," so that no man, much involved in debt and credit, can count upon collecting his "receivables," nor upon the means to meet his "payables" twelve months in advance. This is the great element of bankruptcy here.

I do not propose to interfere with free dealing in money. I ask only that, with respect to money, as to everything else, there shall be no interference with the natural law of value, for such interference can only result in bankruptcy and in loss of capital to the whole country. Let the State banks deal in money as freely as they please, but prohibit their making and destroying currency; for the making of this thing, as they make it, is not producing money; on the contrary, it is producing debts; it is a sure loss of money capital to the nation, dollar for dollar of its amount, and the destroying of it in the contraction of loans is sure bankruptcy, for about tenfold the sum destroyed, among the debts of the people. This is not a matter of opinion, but a scientific truth.

*There has been a statement going the rounds of the newspapers recently, as to the condition of the banks nearest to January 1, 1860. It could not have been derived from the returns at Washington. It omits the balances due to and from banks, and is altogether unreliable as an exhibit of the state of the banks in connection with the currency of the nation.