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

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Chapter 18
Financial Heresies

(Reprinted from Hunt's Merchants' Magazine and Commercial Review, XLIII (Sept., 1860), 317-21.)

To the Editor of the Merchants' Magazine:

The English papers, in commenting upon the recent failures in the hide and leather trade, are quite emphatic in denouncing "accommodation" notes as the cause of the disturbance. This is an old cry of the Bank of England—it is the cry of "wolf" by the wolf, or "stop thief" by the thief himself—in which other banks have joined, both in England and this country. All.of them seem to have a dread of what is called "accommodation paper," as a peculiar sort of kiting which they suppose to possess some especial power of inflation, productive of disaster in monetary affairs. This is mere financial superstition; it is a holy horror of the element of their own existence, condemning their own cherished principle of doing business. All promissory notes and bills are accommodation paper, precisely one and the same thing; and when discounted in bank, unless the proceeds are paid in real money at once, they are exchanged for the accommodation paper or debt of the bank; they are converted into debt currency, which, as it exceeds, when created, the natural volume of currency, is mere kiting that degrades the value of money, locally, causing a loss in the capital of the community invested in money, precisely like the loss to a merchant by the fall of price of the goods in his warehouses. The bank exchanges notes with its customer; no value passes; it is nothing but kiting.

The hide dealer buys 1,000 hides, amounting to $5,000, and gives his note for the same. What then? The hides and the note do not form separate values; they do not make $10,000 of property. The dealer's note is as independent of the hides, and as much in excess of them, as of any other portion of his property; and his hides are no more bound to pay the note to its possessor, whether bank or individual, than his cattle, or his corn, or any other capital he may possess. He creates no value by making his note, and there is no value in it; the value is solely in the property he holds to pay it with, and without which the note is but the defacement of the paper on which it is written. When the property passes into the hands of the holder of the note, the note is extinguished, but the value remains. The bank, therefore, holds no value or property in holding the note; it must part with the note to get possession of the value.

All debt exceeds value, capital, and wealth, both of the individual and of the community; and its quality depends upon the property in the possession or at the command of the debtor to provide the means of payment, whether the property was acquired when the note was given, or months or years before. The hide dealer may have no other property than the 1,000 hides to pay his note. What if the warehouse takes fire, and his hides are consumed? What becomes of the reality of the note, and where is its value then? It is the integrity and ability of the debtor which gives the sort of reality to a note that a bank or a creditor should desire; it is a lien upon his property none the less because of the length of time the property has been in his possession. Obviously the so-called "real" note of the hide dealer for $5,000, with nothing but the 1,000 hides to furnish the means of payment, is no more real than, and surely not as good as, the so-called "accommodation" note of the individual who holds $100,000 worth of property behind it; and the individual who grants an "accommodation note," so-called, holding a previously acquired property to protect it, does no more to increase debt or cause trouble or embarrassment in financial affairs than he who grants his note for property obtained at the moment. There is no harm done by either note, if held to maturity or exchanged at any time for honest money; it is the operation of the bank that does the mischief, in putting mere debt into the office of money; in making a fresh creation of a currency of price, without the attribute of value, by giving bank debt instead of real money for the note. Promissory notes, given for goods purchased, merely postpone the payment and the use of currency or money; requiring it some months hence instead of to-day; and then, at the maturity of the obligation, the demand for money or currency, so far as this transaction is concerned, is just the same as it would have been to-day if the commodity had been exchanged for cash, and the business settled at once.

The party essentially accommodated in this business is the bank that gives its promise to pay on demand in exchange for the dealer's note, pretending thus to convert it into money, and making its whole support and profit out of the forbearance of the people—its creditors—who do not call for their pay, but hold pieces of paper, or bank balances at their credit, and innocently pay, instead of receiving, interest thereon for the indulgence they grant the bank. When its creditors demand their money, its debtors are called upon to pay money the bank never loaned, never had to loan, and necessarily has not on hand to meet its running demand liabilities: then comes the crisis that many writers call a "panic." It is such a panic as the wasted sufferer feels whose lungs are losing their power of inflation; it is no panic; it is the inevitable crisis of death.

It is therefore only the "accommodation" notes and debt of the bank, now deluding the easy credulity of the public, that need to be repudiated. The capitalist has no occasion to pry into the concerns of the honest trader to learn the origin of his "bills receivable." The dishonest trader may sell goods backwards and forwards, with or without removal, and present bills as vouchers, apparently as real as truth, that are as unreal as falsehood or a vision of the night; he merely deceives the devil if the bank believes him; for there can be nothing more unreal in its pretensions than the debt currency itself—this is speaking of the principle of the system, and not accusing its managers, who are no more responsible for its evils than the rest of the public who sustain it. The capitalist, or the bank, needs only to know the integrity and ability of the sureties for the loan. Whether the paper presented for the same be obtained for goods immediately delivered, or is merely borrowed for the purpose of obtaining the loan, makes not a particle of difference in the extent of the obligations, or in the financial affairs of the community; the only unreal thing being the fictitious currency created from debt without labor and without value. So much for the much-abused but innocent accommodation paper.

The second heresy is the notion that the bank compounds interest, and gains more by discounting short than long dated paper. That this notion should prevail among intelligent people, and even among bank directors, as it does, is peculiar evidence of the manner in which everything is taken for granted, without reflection, in this important business of creating and destroying currency and altering the value of money, which, more than any other business, needs the most careful investigation. It does not require even a slate and pencil to refute this weak notion. The bank deducts, in round numbers, $60 discount on $1,000 loaned for twelve months; this sum of $60 is reinvested as cash, which gains $3.60 more in discount for the year. Obviously it produces the same result to discount six notes at two months each for the sum of $1,000, making $10, and reinvesting 60 cents each time, only with much more accounting and trouble. It is not to be supposed that no accomplished merchants and bank directors understand this simple matter, but it is a very prevalent heresy, notwithstanding.

In exchange dealing, of course, the case is altered: if the bank can gain by charging exchange on each discount transaction, the shorter the paper and more frequent the transactions, the better it is for the bank, and the worse for the people.

The third heresy is not so obvious, and requires closer examination. It is that when the banks of any city discount notes and bills due and belonging to another city, the course of exchange turns against the former, and specie flows to the latter, because the money owned in the former is loaned to the latter. We have a case in point at this moment. The Boston banks aver that the unprecedented expansion of their loans arises from discounting paper for New York that is owned and payable in New York, and that alone is the reason why Boston is sending specie to New York almost daily at this time, July 21st. This is very plausible, and at the first glance seems very reasonable, but nevertheless it is not quite true. The delusion is in the total misapprehension of the nature of money. Money is merely a portion of capital, like any other commodity, and goes, like other things, from where its value is less to where it is more; it is a claim upon capital, and not specially or merely money, that Boston has been lending to New York; money will not go to New York in consequence, unless it is cheaper in Boston than in New York; it follows the law of value in this, like every other thing possessing value in exchange. Hides or hemp or cotton goods or capital in any other form will go to New York when the commodity is cheapened in Boston, so as to be worth more in New York, and capital thus transferred constitutes a fund to be drawn upon in making the bank loan to New York. Accordingly, we see that the Boston bank loans have been increasing during a dull business, locally, for a year past; and, especially during the last six months, the dullest of all, they have increased $5,000,000; but specie was not transferred to New York as the loan advanced; the reason is obvious; because specie was as valuable here as in New York, and capital, in some other and cheaper form, had directly or indirectly placed Boston funds in New York to supply the loan. It may have been received in returns on Boston account from foreign ports, or from the south or west of our own country, as well as in goods forwarded directly from Boston to New York.

But additional local currency has been created by the Boston bank loans; money has been thereby cheapened in its exchange value, and driven abroad, or it has been prevented from coming in. The value of all consumable things is maintained by consumption, under an enlarged supply, to a very great degree, because as their value declines, their consumption increases; so that their value or price never falls in proportion to the increased supply. But money is not a consumable commodity, and it is therefore uniformly cheapened by an increased supply; unless about tenfold the equivalent value of other things is produced, simultaneously with the money, so that the relative exchangeable power of money and property may be steadily maintained, which is absolutely impossible with the vast supply of money, and the fitful addition of debt currency now flowing upon the commercial world. This debt currency is produced instantly, and without labor, by issuing a promise to pay; property cannot be produced without time and labor. As nearly all commercial transactions are made through debt and credit, the fictitious addition to the currency must have time to percolate through the exchanges before the effect is felt. As a purgative requires time to change the gastric juices and become digested, this unwholesome dose of fiction is at length ejecting money from Boston rapidly; not because of any loan to New York, more than to Boston dealers; but because the increase of bank loans has been proportionally greater in Boston, and cheapened money below its relative exchange value in New York. Money, therefore, must continue to flow to New York in excess of its receipt in Boston, until one of four things takes place; either Boston must reduce her loans, or New York must increase hers; or Boston must supply more goods, or New York less goods to the common market, proportionally. The value of money being always relative to something against which it is exchanged, there must be more currency or less goods in New York to cheapen money there; or there must be less currency or more goods in Boston to enhance the value of money in Boston. Either of these four things will, after awhile, bring about an equation of exchange between the two cities, by equalizing the value of money, and nothing else will.

Whether the Boston banks possess very accurate information of the amount of Boston paper discounted in New York, so as to judge that they have loaned an excess to that city, is rather problematical; for there is a continual cross firing of this sort between the two cities; but it matters not; exchange will turn against Boston, and specie will be forced to New York, just as soon, and as inevitably, by discounting Boston paper in Boston, as by discounting the paper of New York. Similar kiting is common between the bankers and merchants of England and the United States, with of course the same result. If the banks of New York, Boston, Philadelphia, Sec, increase their loans in domestic paper, they will as effectually turn the course of exchange against this country, and compel the shipment of specie, as by discounting bills owned and payable in London itself.

The fourth heresy is that the banks lose interest on their reserve of specie, and that the holding of specie is therefore unprofitable; so that they make a greater profit by holding only 10 or 12 per cent of specie to their demand liabilities, as is usual in Massachusetts, than 33% per cent, the ratio fixed by law in Louisiana. This mistake Mr. Hooper pointed out in his recent pamphlet, and I demonstrated the same in figures in your May issue of this year. It is sufficient, therefore, to repeat, that the ownership of the specie is loaned in the bank notes and inscribed credits, and the bank gains interest on the same, accordingly. It is even more profitable to hold the larger proportion of specie, because the loans can be thereby maintained at higher figures, and consequently producing a larger income without additional cost.

There is no science that bears so immediately and so powerfully upon both the material and moral interests of society, as political economy, and no branch of this is so important as commercial finance; yet nothing is more crowded and obscured with error, and nothing is so utterly neglected by businessmen. The trouble with the hide and leather and shoe trade, both in England and this country, is not "accommodation notes," merely, but converting debt into currency, the destructive and ridiculous artificial cheapening of money, with the consequent price above value that can never stand.

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