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Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
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Chapter 17
Mr. Lowell vs. Mr. Hooper on Banking and Currency


(Reprinted from Hunt's Merchants' Magazine and Commercial Review, XLII (May, 1860), 575-85.)

A pamphlet on "currency," by John A. Lowell, of Boston, has come into my hands, entitled "A Review of Mr. Hooper's Pamphlet on Specie Reserves." It is a curious work, and instructive also, as showing the dense fog in which the subject of money is enveloped among even educated men, by the system of creating fictitious or theoretical currency; the contrivance of the Bank of England—dollars of price and debt to be paid in dollars of value with no value created to pay them with. If this element of bankruptcy had never been contrived, the subject, in the public mind, would be under the dominion of common sense, where it certainly is not to-day.

Mr. Lowell is, doubtless, one of the most accomplished businessmen in the United States, and a bank director withal. Surely he ought to understand the subject; but he and Mr. Hooper are widely at variance in their conclusions upon it.

Mr. Lowell says:—"No one in this country will deny the convenience of a mixed currency." I beg to dissent; it is denied by thousands. He says:—"The substitution of paper for the precious metals is a labor-saving machine." Very well. Is not the "labor-saving" quite as great with certificates of deposit for coin in reserve, dollar for dollar against them, without the mixed currency? Again he says:—"The issuing of coin, stamped with a known and invariable value, is a privilege reserved to the sovereign." What sovereign but the Almighty has this reserved privilege? What other sovereign can stamp an invariable value upon anything? The law of value is a natural law of compensation in the exchange of products, material and immaterial, as unchangeable as the law of gravitation; no earthly sovereign can determine an invariable value, and it follows that he cannot stamp value upon gold or any other commodity.

The sovereign may prevent monopoly, and any improper interference with the natural law of supply and demand, especially with respect to money, because he may prevent the unnatural production and destruction of currency, but he cannot alter the law of value, which in the nature of things is immutable. He may stamp quantity and quality upon coin, but not value.

The public inspector stamps a barrel of flour, by which the purchaser or receiver may understand that it contains 196 pounds of a certain grade or fineness; it is then considered a barrel of flour, and passes accordingly. The public assayer stamps a disk of gold, by which stamp the purchaser or receiver understands that it contains 25 8/10 grains of a certain fineness; it is then considered a dollar of gold. There is no difference in the effect of the inspection in these cases; neither determines the value in the slightest degree; that is relative always, varying with supply and demand. If the barrel of flour is worth five dollars, five dollars are worth a barrel of flour; and increasing the supply of either, will reduce the relative value of the increased commodity, while reducing the supply will increase the relative value of the scarcer commodity.

It should be noted, however, that an increase of flour is an increase of utility, because 200 barrels of flour will feed more people than 100 barrels; but an increase of money is not an increase of utility, because $200 will not transact any more business, when included in the general currency, than $100, the only effect being to double the price of things, by reducing the value of money one-half.

It is obvious, that if this increase and decline of the value of money takes place here and not elsewhere, it must increase the import of foreign goods, and diminish the export of domestic goods, and, to the same extent, money will be exported at the reduced value. If the currency created by debt, theoretically convertible, like our debt currency, which is convertible only because its conversion is not demanded, the money exported is lost capital; for the debt of the banks takes its place. So far as the bank currency exceeds the specie in reserve, it is nothing but debt balanced by an opposite discounted debt of the State or individuals, and contains neither capital nor value. The debt, public or private, of the nation, is no addition to national capital or wealth.

Now, this fictitious currency interferes as effectually with the prerogative of the sovereign, and with the value of money, as would an undetected counterfeit currency, whether of metal or paper, for it is equally in excess of all the capital, money, and value in the world; and when its nature is clearly understood by the leading minds of this country, it will be as rigorously suppressed as base coin. Its essence is in the constructive "deposit," from which the bank note is but an emanation. It creates price without value, and is made and, destroyed by the banks themselves.

It is a common error, even among bankers, to suppose that they always discount on their circulation and deposits, that is to say, on previously existing funds, whereas, the discount creates the deposit, the discounted note forming the only fund out of which it is itself discounted, and the only question the bank needs to consider is, whether the reserve of coin is sufficient to meet the returning liabilities. Thus, A purchases goods to the amount of $20,000 on credit, and we may suppose, to avoid misconception, that he is a poor man, although whether rich or poor, makes no difference in the principle; he has now $20,000 of the aggregate property of the community in his possession, and no more; then he gives his notes for the same. Surely he does not create any property, or add $20,000 to the wealth of the community, by running in debt and making his notes for $20,000. There is only one value of $20,000, and that A holds in the goods. Now, A's creditors get his notes discounted in bank, and have, say $20,000 placed to their credit as "money deposited." If the bank transferred coin to a special deposit against this sum, it would be a real deposit, and in paying checks upon the same, it would deliver a value for A's notes, the transaction being perfectly legitimate and proper; the bank would transfer, but would not create a "deposit," and would then do what it is now supposed to do, namely, loan pre-existing funds; but now it does not do this; it inscribes a ledger credit, called "deposit," for money not deposited and for a value never created. Next A sells his goods, takes his customers' notes, gets them discounted, having $20,000 placed to his credit as "money deposited," and we may suppose this thing to be again repeated, another $20,000 of "deposit" being created in favor of the third sellers of the same goods. Here, then, is $60,000 of currency created virtually out of nothing, having all the purchasing power of gold coin, without a fraction of capital, value, or wealth in it. The distinction between the bank debt and the others is, that the others are for a value received and circulated in each transfer, which value provides the means of payment of each note within the measure of price of the existing currency; it is the ordinary circulation of property, perfectly normal and just. But the bank circulates no property in its debt over and above the coin in its coffers, and receives and exchanges no value more than would pass between two individuals, who should exchange accommodation notes, and re-exchange at their maturity, one debt always standing against the other until the time of set-off, in the contraction of loans, when both are extinguished, and if discounted in bank, so much currency is destroyed. The bank erects a mere obligation of debt into currency, which swells prices upon nothing. As money or value, this currency is as baseless as the fabric of a vision, for the value is not in A's discounted note, and of course there can be no value in the fabric of currency erected upon it; the value is in A's goods, with which the bank has nothing to do, and which he disposes of at his pleasure. The discount and "deposit" operation is abnormal and unjust, because it injures the community, both in the expulsion of capital, and in the creation of false prices, that infallibly produce inflated obligations impossible to fulfill. It is inevitable bankruptcy to somebody in the end.

Mr. Hooper appears to understand the nature and effect of this imaginary bank "deposit," with its progeny of bank notes, although he is unfortunate in applying to it the term "capital," which it is not. Mr. Lowell apparently has no conception of the fictitious and imaginary character of this thing, and this, with a total misapprehension of the nature of value, destroys the foundation of his argument; so that his superstructure, in my opinion, falls to the ground; it is the fatal defect of his book.

The rule for cooking a hare begins, I think, "First catch your hare"; this rule Mr. Hooper proposes to apply to banking. If the banks lend promises to pay dollars, he proposes that they shall have and keep one-third of the dollars they promise to pay; a very moderate proposition surely, and reasonable withal, although quite overlooked in our present system, except in Louisiana, Arkansas, Mississippi, and Texas. He does not go the whole animal, as I do; nevertheless, his movement is in the right direction, and his principle, carried out to its ultimate conclusion, requires the whole.

The principle stated by him that "a large amount of specie in the vaults of the banks is more profitable to their stockholders, and more beneficial to the community," Mr. Lowell dogmatically says is manifestly false. It seems to me irrefragable, although I differ with Mr. Hooper as to the method of getting and retraining it to cover the credits and issues of the bank.

Mr. Lowell says:—"Supposing a bank to keep specie equal in amount to its capital and liabilities, it could not loan one dollar, and would pay its rent, salaries, and expenses in dead loss."

This is an extreme statement, founded, I think, upon the common notion, that the holding of specie is a loss to the bank, which I will consider directly. On the plan of banking that I would advocate, however, it would be possible to loan the capital as well as the deposits, in credits and certificates, retain coin to any desired extent, and do a profitable business.

In the present system there is no interest paid on deposits by the banks, usually, and surely it would seem that the more specie they retain against their interest-drawing liabilities, on these easy terms, the greater should be their profits, because the expansion of loans must depend upon the stock of specie, and the greater the loans the greater the profits, of course.

To illustrate, let me present the following comparative statements on the New Orleans scale of one-third coin to liabilities:—

1,000,000  capital.
1,500,000  credits and circulation.
2,500,000
500,000  deduct coin for 1/3 liabilities in reserve.
2,000,000  loan on discount and exchange, at 7 per cent $140,000

CONTRA
Rent, $1,500; salaries, $9,000 $10,500
Bad Debts, say one-fifth of 1 per ct., $4,000; contingencies, $3,500 7,500
18,000
Dividend,twelve-and-one-fifth percent per annum $122,000


Now suppose the reserve of coin to be doubled:—

1,000,000  capital.
3,000,000  credits and circulation.
4,000,000
1,000,000  deduct coin 1/3 liabilities in reserve.
3,000,000  loan on discount and exchange, at 7 percent $210,000

CONTRA
Rent, $1,500; salaries, $9,000 $10,500
Bad debts, say one-fifth of 1 per ct., $6,000; contingencies, $3,500 9,500
20,000
Dividend, 19 percent per annum $190,000

The question will occur here, can the bank obtain so much specie and retain it by its own working? This must depend upon the character of its patrons, and of the local currency. In a city of large capital, where floating balances require a safe depository, where bank issues are restrained, and there is much specie in circulation, absolute deposits may keep up the fund; but an institution established by borrowers, like many of our modern banks, with only debtors for customers, cannot do it, because their deposits are fictitious and not absolute. I am, however, only stating a principle, and it seems very clear to me, that the only limitation to bank loans is the want of cash means to expand. So long as the bank can command the specie without interest, there seems to be no limit to its ability to increase its loans and its profits.

The loans of the Boston banks on a capital of $36,000,000 are $60,000,000, or 66 2/3 per cent in excess of their capital, which is about the ratio for the State of Massachusetts at this time. The bank specie is only 11 per cent of the immediate liabilities in the whole State, which must be all reckoned together, as the banks out of the city lean upon the Boston banks for their specie funds. Can there be a doubt that the loans could and would be increased by an increase of specie?

Mr. Lowell quotes with approbation the English banker, Fullerton, who says of the country banks—and the rule, if good for anything, must apply to all the banks:—

The amount of their issues is exclusively regulated by the extent of local dealing and expenditure in their respective districts, fluctuating with the fluctuations of production and price; and they neither can increase their issues beyond the limits which the range of such dealing and expenditure prescribes, nor diminish them, being at an almost equal certainty of the currency being filled up from some other source.

I am not unacquainted with this gentleman's opinions; they have been extensively quoted by J. S. Mill, and by many of the apologists of the Bank of England. He seems to be the chief modern authority for the notion, so prevalent in England and this country, that all public financial difficulties spring from overtrading, the bank being perfectly innocent and uninfluential in the matter. He was accordingly opposed to Sir Robert Peel's modification of the Bank Charter Act of 1844 to limit the issue of bank notes. His views probably suit his interest as a country banker, but in any opinion they are exceedingly fallacious.

In England, almost without exception, the "deposits" occupy in public opinion an anomalous position; they are not considered to be ordinary mercantile credits exactly, nor are they supposed to be currency; but they are by some process of reasoning generally placed in the same category as the ordinary book credits of merchants which arise from the transfer of an absolute value. The bank notes, however, are understood to be currency; thus Sir Robert Peel and Mr. Jones Lloyd—now Lord Overstone—supposed they were doing all that was necessary to control the currency and regulate the commerce of the kingdom, by restricting the issue of bank notes to £14,000,000, against an equal sum of government securities, the issues above that amount to be against coin held in reserve; but that restriction amounts to nothing, and is suspended by Parliament as soon as all the usually unemployed notes are issued. In the debate on the commercial distress in 1847, Sir Robert Peel expressed his disappointment at the operation of that act, but he and others found no other solution of the difficulty than the vast accumulation of debt in the kingdom, on an entirely insufficient basis of specie. Mr. Hume alone seemed to have an adequate conception of the truth of the case; he said:—"The bank pretends to discount bills for merchants and bankers, when it has not a shilling to do it with. The whole difficulty arises from having the bank founded on a wrong principle."

Mr. Fullerton seems to refer only to the bank notes, but when the "deposit," so called, is created, it is wholly immaterial whether its funds circulate in checks or notes; they are currency in either form, equally effective in degrading the value of money, and wasting the capital of the nation.

If 100 tons of gold, equal to $50,000,000, were thrown into the New York market to-day, in excess of the present supply, it would unquestionably cause an immediate and material decline in the local value of money there; by which I mean, its exchange value and not the rate of interest; transactions would be made, there would be much "local dealing and expenditure," prices would rise, imports would be attracted by the high prices, and merchandise exports would be prevented or checked by high prices, until that excess of money could be distributed to an equation of value with other cities and other nations; it would ultimately find its level of value over the whole commercial world.

Precisely the same result, as to the decline in value and distribution of money, would follow the precipitation of the same amount of convertible bank currency upon the market. Let it be known that the banks are prepared to furnish $50,000,000 by discounts, in addition to the present local volume of currency in New York, and a ruinously active business would soon take place in the creation of notes for discount, competition in prices, import of goods from other cities and other countries to be held at high rates, and largely kited over by bank accommodations. There would be plenty of speculation, which would be of no utility whatever in approximating goods to the consumers, but a ruinous tax upon their necessary consumption, until that sum of specie could be expelled, and the banks checked in their destructive course.

This is not altogether an imaginary case, but the practical lesson of the day. From January 1, 1858, to January 1, 1859, almost precisely $100,000,000 of these fictitious funds were added to the volume of our national currency, in the manner I have already described. For a time in the early part of 1858, people could not conceive the cause of the rapid increase of bank loans, when the business of the country was extremely dull with an abundance of gold, and, therefore, no need of any addition to the bank currency. It was this gold, and the opportunity it afforded to accumulate bank dividends, which caused the discounts and the increase of currency, and the expansion soon put things in a whirl again; imported goods rushed upon us; the Western products, which had begun to move rapidly outward in the winter of 1857-58, with the foreign exchanges in our favor, rose in price just enough to prevent their export, turn the exchanges against us, and of course turn the export demand upon gold; these products were piled up in New York until the warehouses broke down under their weight, while gold poured out of the country at the rate of two to five millions of dollars per week at last.

The bank currency continued to increase until May 1, 1859, when the banks found themselves obliged to resort to a sharp contraction, and thus destroyed the fiction they had created, to the amount of $35,000,000 by the middle of August, which checked the export of gold by bringing the foreign exchanges to par, broke down the debtors of the inflated West, and ruined the shoe trade and other industrial interests of the Northern States.

There are always circumstances to prevent an alteration in the value of money, and especially a sudden one, from operating equally upon all commodities and upon all parts of the country alike. Capitalists control some commodities, who can and who will by competition among themselves raise and maintain the price of their special merchandise, while other business, being more widely distributed among weaker men, falls into embarrassment, under any considerable appreciation of the value of money, directly. Such has been the difference between the hide and the shoe trade since the bank contraction from May to August last. And such a contraction and consequent appreciation of money will always fall with the most severity on that portion of the country where the inflation has been the greatest: this has been of late years our Northwestern States, while the South, once famous for expansion of banking, speculation, instability of prices, and bad debts, having avoided their old folly since 1845, and kept down their currency nearly or quite to the specie measure, have scarcely suffered at all.

The experience of the past three years in this country, like other periods of great change in the volume of currency and value of money, clearly disprove the doctrine of Mr. Fullerton and the other anti-bullionists of England. It would be as reasonable to say that the amount of the issues of gold in California is exclusively regulated by the extent of local dealing and expenditure there, and that such issues cannot be increased beyond the limits which the range of such dealing and expenditure prescribes. In one sense this is true, but in every sense I think it is sophistry.

How was it in France under the operation of Law's bank from 1716 to 1720? There can be no doubt that the local dealing and expenditure kept pace with the operations of the bank; there was prodigious activity for awhile and a prodigious advance of general prices; this advance of prices was nothing but a fall in the value of money, which consequently poured out of the kingdom in every shape and manner, open and disguised, in which it could be put over the borders, until the bank stopped payment and the true value of its issues was ascertained to be nothing; the nation lost a vast amount of capital by it at last. Mr. Fullerton's theory would make the mad speculations of that period the cause of the bank issues, and such has been the argument of all the paper currency advocates in every commercial revulsion in England and this country. It surely will not answer: they mistake effect for cause.

It is said to be a poor rule that will not work both ways. Is it a decline of "local dealing and expenditure" which causes the contraction of bank loans, or is it the contraction of the loans which causes the decline of the dealing and expenditure?

When any one bank creates anew any considerable amount of the fictitious currency, other banks find themselves in funds they scarcely know how; they are creditors, and having balances against the debtor bank, they also can manufacture currency; they become debtors in their turn, and can remain so very comfortably until the increase of currency has had sufficient time to make a general degradation of the value of money. This thing uniformly commences on our side of the Atlantic in New York, and it reaches the western prairies with the most cheering appearances of good times in the rise of prices and "local dealing and expenditure" which appear to be its cause, until at length we find ourselves suddenly called upon to meet engagements to deliver large sums of money that have been exported to Europe, which can only be recovered by the export of goods or reproduction of the capital necessary to buy the money. This is our constant experience, and it is surprising that the fictitious and imaginary "deposit" should not be recognized by Mr. Lowell as its cause.

"The nearer a bank comes in its specie reserves," he says, "to the amount of its capital and liabilities, the smaller will be its profits." As thus stated, this appears to be a mere truism which can hardly be worth attention, for the difference is precisely the sum of the loan, and of course the smaller the loan the smaller the profits. Mr. Hoopor cannot be at issue with him on this point, for it is too plain to be questioned. But I think Mr. Lowell means to convey the idea that the specie reserve is idle and earning nothing, and the greater its amount the smaller the profits of the bank. This is a very common opinion among bankers, and Mr. Lowell's statement will certainly convey this idea to readers in general; but it is incorrect, for it makes not a farthing's difference in the profits of the bank whether it retains a large or a small amount of specie within the limit of the loan.

The ownership of the specie is loaned in the bank notes and credits, and the coin is earning interest as effectually as if it were itself issued instead of the notes. So far as coin remains in reserve, the bank notes are certificates of deposit, and the credits are absolute deposits; so far the present system of banking is unobjectionable. The profits depend wholly upon the amount of the loan and the excess of the loan over the capital, not over the specie. This is easily demonstrated. Thus, suppose—

$1,000,000  capital.
1,111,111  credits and circulation.
2,111,111
111,111  deduct coins 1/10 of liabilities.
$2,000,000  loan at 7 per cent $140,000

Now assume the New Orleans scale of 1/3 coin to liabilities:—

$1,000,000  capital.
1,500,000  credits and circulation.
2,500,000
500,000  deduct coin 1/3 of liabilities.
$2,000,000  loan at 7 per cent $140,000

According to the idea conveyed by Mr. Lowell, whether he intended it or not, the profits of the bank should be much smaller in the latter case than in the former, whereas it is plain that the increase of the specie reserve makes no difference in the profits, the only effect being to increase the liabilities in holding the coin, or decrease them in paying it out instead of the notes.

I am well aware that banks holding only one-tenth specie to liabilities cannot lend double their capital. It seems to me that the Massachusetts banks, with 11 per cent of specie to liabilities, are doing all they can in the way of expansion on this proportion of specie, by exceeding their capital two-thirds in their loan, and with any considerable adverse turn of the exchanges of the country, I think they are unsafe at that. With one-third specie to liabilities, I am satisfied they could lend double their capital safely, and these figures further illustrate the point raised by Mr. Hooper, in regard to the increased business, profits, and security of the banks and the public by holding the larger proportion of specie. Surely the banks can do business with more facility and security under the reduced pressure of debt relatively by holding $1 of coin to $3 of demand debt, than by holding only $1 of coin to $10 of the same.

If the loan must fall from $2,000,000 to $1,666,167 by reason of holding only 10 per cent of specie to liabilities, as I believe, and as our Massachusetts experience proves, then it is clear that the gross income must fall from $140,000 to $116,667, making a difference of $23,333, or 2 1/3 per cent in the dividends; and as it costs no more to hold $500,000 than $111,111 of specie, this 2% per cent is virtually a dead loss of profit by reason of the banks and the community being uselessly involved in debt in proportion to the real money or value which alone can discharge obligations without destroying a like sum of the currency. The banks can never contract their loans, that is to say, make a set-off between their debts and credits, without destroying so much currency, leaving no money in its place to maintain prices and the obligations of the community. Bankruptcy is the inevitable consequence of every general bank contraction.

But a point of the greatest importance, that both Mr. Hooper and Mr. Lowell fail to consider in this connection, is that the specie is capital earned by local production and dealing, and the more there is of it required and retained by the banks the greater must be the general business and the means of the people to support the banks.

At the general returns of the banks of Massachusetts early in February, 1860—the only returns I have at hand—the liabilities, including balances due to banks, amounted to $54,327,488; specie, $5,891,539, being $10.80 of specie to $100 liabilities. To increase the specie to the New Orleans proportion would require $12,200,000 more of money capital in the State. This is not to be had like bank debt, by exchanging promises to pay; it must be the product of labor, and business, and increased exports, and the consequent local dealing would largely promote the interest of the community, as well as increase the means of the banks.

Nothing is plainer, to my mind, than that the employment of bank debt, which is not capital, in the currency has the effect of expelling and repelling money capital, which would otherwise be employed in place of the abnormal, useless, and bewildering bank debt, the nature of which few consider and almost nobody understands; and that the restriction of this currency must cause the reproduction of capital to furnish money—real money—to supply its place, and a wholesome activity of business to produce this result.

I consider Mr. Hooper's suggestion of the New Orleans scale of banking, with one-third specie to demand liabilities, good, as far as it goes. It was because of the more stable currency, in my opinion, that "cotton, the great staple in New Orleans, nearly escaped the effects of the crisis, and there was, in consequence, scarcely any panic there in 1857." Here, again, I think Mr. Lowell mistakes effect for cause, for he thinks the steady price of cotton maintained the stability of the currency in New Orleans. But we can do better for ourselves than to rest content with the example of New Orleans. There is no need of demand liabilities without 100 per cent of specie in reserve against them; with this reserve the loans are released from all restraint, and money, like every other commodity, will find its natural level, and be always in its normal condition of value by the natural law of demand and supply. Banking would be more profitable on this plan than on the present one of fiction.

The following pro forma account may serve to illustrate this method of banking:—

$1,000,000  proprietor's capital paid in specie.
5,000,000  deposits on stipulated time, or with due notice of withdrawal
6,000,000  loan at discount and in exchange dealing, say 7 per cent per annum $420,000

CONTRA
Interest on $5,000,000 deposits, at 5 per cent per annum $250,000
Loss of interest on $40,000 specie in reserve, at 7 per cent 2,800
Rent, $1,500; salaries, $9,000 10,500
Bad debts, one-fifth of 1 per cent, say 12,000
Contingencies 4,700
$280,000
Dividend on proprietor's capital, 14 per cent per annum $140,000

The loans must be so averaged as to time that the receipts shall always precede the demand for payment of the deposits. The operations of the savings banks without any capital at all show that deposits of $5,000,000 may be obtained with such ample capital as above stated to protect and give entire confidence to depositors, or, with less capital, deposits of less amount may be maintained at five times the sum of the capital. This bank may be called a "Trust Company" or a "Savings Bank"—the name is of no consequence; but the loans should be made on commercial paper and active securities, so that the money would be constantly employed in the currency, either in coin, or in checks, or certificates of deposit, with coin in reserve, dollar for dollar, against the demand liabilities. Such reserve would be on special deposit without interest.

In regard to the security of such business paper as is discounted by well-managed city banks, it is very perfect; the risk of loss on such paper is almost nothing: one-tenth of one per cent will cover the average loss by bad debts on such paper and leave a margin of gain besides. On this point there is a ridiculous inconsistency in the public mind. Bank stocks are the favorite securities, and savings banks invest in them largely. What security do they afford better than the business paper in which the banks invest their means? And yet the savings banks take the stockholder's risk—the very worst risk of the banks of issue, for their circulation and "deposits" must be first paid, and the stockholders get only what remains.

Here would be no fiction of a "deposit"—no fiction of currency created. The institution, by whatever name, would be an honest "bullion bank" dealing in capital—getting money before loaning it—and it would cause a reproduction of some $6,000,000 of actual capital to be exchanged for money and employed in the currency, displacing an equal amount of the present fluctuating and damaging bank debt.

The truth is, the only agency that performs any real service in the exchanges and in the circulation of property is capital; the debt currency only hinders its prompt application, postpones the settlement, and embarrasses the business. One hundred barrels of flour buys one hundred yards of broadcloth, and the broadcloth buys the flour; commodities pay for commodities, always, and the more directly the exchange can be made the better. If we have a currency of capital—that is, of money—there is an exchange of capital through the merchant in effecting the transfer; the business is settled at once, bringing nobody in debt.

But the present currency system interposes an obstacle to this prompt exchange; it repels the money, and debt must be contracted to maintain the banks. The flour and the cloth must be sold on credit; notes are made; the flour seller runs in debt, say $500, for the cloth he wants, and the cloth seller $500 for the flour; there is probably a middleman between them—the merchant—who grants his notes to both parties; all these notes are discounted in bank; the bank runs in debt $2,000 for the notes, and now, with all this accounting and complication, what is effected? Simply an exchange of the flour and cloth, which might have been exchanged without any debt or complication at all. The interests of all these parties, the bank included, are suspended upon the wings of paper currency, and subject, unnecessarily, to the fluctuations in price and value of their means to discharge the notes till their maturity.

And what capital does the business? Just the flour and the cloth; there is not another dime concerned in or about it. The banking system merely unsettles it and postpones the adjustment to a future day, taking, however, a dividend out of it for the profitless service.

Shadow will not do the work of substance. Substance does all the work and pays all the costs. Shadow serves only to bewilder, and they who rely upon it, as is the almost universal custom in this country, are very sure to be left at last without any substance at all. Such is the painful experience of nearly all our businessmen.



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