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Tu Ne Cede Malis

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

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Chapter 19
Currency of the United States

(Reprinted from Hunt's Merchants' Magazine and Commercial Review, XLIII (Nov., 1860), 574-83.)

The currency of the United States consists of all the metallic money not in absolute hoards, and the sum of the immediate liabilities of the banks, except the coin in their coffers. The sum total of currency in money and bank debt is permanently the same as would be present in the nation and be offered, or in readiness to be offered, in gold and silver, in exchange for commodities and property, and in the payment of debts. When it exceeds this, the course of exchange is against us, and money runs away. Buried treasure, or money so absolutely withdrawn from business and from circulation, as to have no influence upon the owner's mind in directing his expenditure, is not currency; it is an absolute hoard, having no more effect upon prices or upon business than if it did not exist. But we must not confound this miserly store with the stocking deposit of the Dutch farmer, for example; which, although a reserve fund, influences his expenditure, and, as there is more or less of it, induces him to hold his commodity at a higher, or sell it for a lower price. The proportion of money thus at rest, in relation to the volume of currency, is not greater than the proportion of commodities at rest, in relation to the whole circulating property which necessarily remains on hand waiting the right customer or a satisfactory price; and the line between the currency and the hoard is not more imperfectly defined than that between the property in and out of circulation. There is always a considerable quantity of property not in circulation, that is to say, not offered for sale, that some large price would tempt the owner to part with, and there is about the same proportion of money in idleness that may be tempted into action by offering for it a sufficient quantity of property. These two opposite exchangeable values neutralize each other.

We have, then, a controlling measure of price in the volume of currency, the public instrument of exchange. As that volume increases in relation to the circulating property, the value of money falls in a general or average rise of prices; and as it decreases in relation to the circulating property, the value of money rises in a general or average fall of prices. So far as price is concerned, of course the effect is the same if the circulating property increases or diminishes in relation to the volume of currency; for as it increases in quantity its price falls, and as it diminishes in quantity its price rises; but it is not by any means the same in regard to value or wealth; for the variation in the volume of currency merely alters the value of money, it does not affect the absolute value of other property, and the nation is just as rich with little money and low prices, as with much money and high prices; but when the property of the country diminishes in quantity, the public wealth declines, although prices rise; and when the property increases in quantity, the public wealth increases, although prices fall. This is more apparent in an isolated community or nation, such for example as Japan has been for two centuries past. Every nation is quite as well off with little money as with much; but a commercial nation or community, such as Japan has now become, is vastly better off with the less money or more limited currency. Japan, with a limited currency, having a plenty of circulating property, has now the most valuable money in the world; it is valuable because of the quantity of property it will exchange for, and nothing but war or nonintercourse can prevent her from becoming an immense exporting nation. I think Europe and America will be astounded at the extent of production, activity of business, and increase of wealth, in Japan in a very few years, if the empire escapes internal dissension and external war.

It is the quantity and quality of cultivated land, dwellings, warehouses, ships, steamers, factories, schools, utilities of all kinds, and everything that contributes to human enjoyment, which constitute wealth; this wealth is the same in value at any price; it is not, therefore, of the least importance what volume of currency we possess, so that the coins are not too diminutive or too large for convenient use, excepting the less currency the better for the convenience of handling, and because where there is the least currency relatively, money will buy the most, and where money will buy the most, business will go. As with individuals so with nations; where the best bargains are to be had, customers are plentiest and make the largest purchases. What we want, then, is to increase our stock in trade and not our currency; for money itself will come fast enough by the increase of commodities; no earthly power and no contrivance can keep it out of the country, excepting this that we employ, of cheapening it with an admixture of fiction. The little child, soon as he learns the meaning of a cent, knows enough to go to the shop where he can get the most taffy for his money; and when he grows to manhood he pursues the same simple principle in buying goods; but the sophistication of the currency system blinds him to the fact that the increase of currency and cheapening of money locally by his community, more than elsewhere, adds cost to his goods, enhances their price without increasing their value, and drives his customers into other shops, in other cities, or in other countries. The cheapening of money is a local loss of business and wealth, infallibly.

The effect of change in the volume of the currency follows an immutable law, however delayed by longer or shorter maturing credits, or however obscured to the mind of the unpracticed observer. It is therefore a matter of the greatest importance to know what the currency is and where to look for it.

We must look for it precisely where it would rest if the whole were exclusively metallic, to which volume it must ultimately return from every aberration; the true money or specie measure being determined and marked by the par of exchange on London of 9½ per cent, or $4.8665 to the pound sterling. It will be observed, that with a pure metallic currency, the banks could not be under demand liabilities, either to the public or to each other, without coin in hand dollar for dollar against them; each debtor bank must therefore hold the coin; so that the balances due to banks, as well as to individuals, are currency occupying the place of coin, and the balances due from banks, as well as from individuals, are loans. Thus, taking the returns at Washington, with an approximate estimate of the amount of specie in circulation outside of the banks, I find the national currency, with a proper nomenclature, as follows, nearest to January 1, 1860:—

Bank notes in circulation $207,102,477
Bank credits inscribed for discounts without money 170,207,562
Bankers' credits in California inscribed for discounts without money, estimate 2,000,000
Balances due to banks 55,932,918

Total of debt currency, that is, currency exceeding the money in the nation $435,242,957
Bank deposits absolute in specie $83,594,567
Government treasury, including balances at credit of disbursing officers, specie 10,160,000
In circulation among the people including bankers in California, estimate 84,002,476

Total of money in the currency 177,757,043

Total currency of the nation $520,837,524

Debt currency, as above $435,242,957
Absolute deposits, as above $83,594,567
Absolute deposits with California bankers, say 2,000,000

Money in banks 85,594,567

Total of immediate liabilities $520,837,524

It follows that the ratio of their money to their immediate liabilities is as 16.43 to 100. The ratio of money, outside of the hoards, to the total currency of the nation, is as 29 to 100; and this indicates the method of doing business; the exchanges at wholesale and retail being effected approximately with money 29 per cent, and debt 71 per cent; besides some that are made by the direct barter of commodity for commodity, without the intervention of debt or money. Obviously debt must be created and discounted to bring the debt currency into existence, and it is kept alive by continued renewal or kiting of the notes and bills of customers, against the notes and inscribed credits of the banks. The bank debt is, therefore, merely a portion of the circulating debt of the community, which compels the exchanges to pass through a circuit of debt and credit, by removing so much money from the country, which circuit would otherwise be made with money. This circuit is made by the transfers of raw material, and articles partially and wholly finished, through the hands of manufacturers and tradesmen to the consumers, and the return of the consumers' commodity or produce to close the transaction, when the two, producers and consumers, are mutually paid. Approximately these transfers are five each way; so that we cannot be far wrong in estimating ten exchanges to the circuit. Consequently we maintain a commercial debt upon the above figures of $4,352,000,000, or tenfold the sum of the debt currency, that need not and could not exist with a currency exclusively of money. Every merchant's stock of goods greatly exceeds the sum of currency he retains on hand; and this law of the exchanges in the circuit of money seems to determine the ratio of goods offered for sale, with other circulating property, to be approximately as 10 to 1 of the currency throughout the country.

So completely has the idea of money in the debt currency taken possession of the public mind, that it is difficult for people to comprehend how the above incubus of debt is created, or why there is any more of it than would exist with a money currency. But money is a value purchased with another value in goods, and comes in return for merchandise sold to California and to other countries; debt has no part in its creation. The debt currency is not a value; it is a fiction of money manufactured virtually out of nothing, and is, when created, like every other debt, in excess of all the money and property in the world. An illustration will show how this worse than useless load of debt and embarrassment is entailed upon us. You have 100 yards of cloth for sale at $5 per yard that I want; and I have 2,500 pounds of wool for sale at 20 cents per pound that you want; either commodity amounting to $500. Simple barter would effect the exchange in the most economical manner, and satisfy us both, without debt or embarrassment; but we do not know each other's wants, and do not meet in the market: a middleman or merchant is therefore necessary to us both. If he has $500 of money, as he would have under a money currency, to pay for your cloth that you can pay for my wool, the exchange may be effected without debt or delay of settlement. It is triangular barter; gold, a third commodity of value, being employed as a medium of exchange; but, by the present system, we expel the gold, and thence comes the necessity of debt to create the debt currency and maintain the banks. A merchant gives his note for your cloth, and the same or another gives his note for my wool; then, according to the present custom of making the utmost possible use of banking, you give your note for the wool, and I give my note for the cloth; and now the bank is ready to accommodate all parties in accommodating itself. You and I get the merchant's notes discounted; he gets our notes discounted, and the bank gives in exchange—what? Certainly not money, for that yields no profit; it must lend what has no existence, and make a currency of its debt, over and above its money and capital, on which to charge interest as money, to make dividends; of course, it lends its debt in the form of notes or inscribed credit. You and I now owe $500 each; the merchant owes $1,000, and the bank owes $2,000; and here, on $1,000 of value, by reason of the absence of $500 of money in the currency, is $4,000 of debt created, more useless and unnecessary than a fifth wheel to a coach; $2,000 of it is debt currency which infallibly drives from the country $2,000 of gold, and compels the next traders to go through the same operation of running in debt to effect their exchanges. And what capital is employed in these transactions? Clearly not a dime but yours and mine; your cloth and my wool: our capital maintains the merchant and the bank, and all their clerks and rent and charges; we are entangled in a useless debt, with the fluctuating values of a currency continually expanding and contracting to accommodate the cupidity or necessities of the bank, and we run the risk of bankruptcy, out of the proceeds of our own labor, which, under a money currency, would have been exchanged without any risk whatever. Every time the cloth or the wool is exchanged in its progress to the consumer, more debt and more currency of the same sort are created, and an oppressive mass of debt is thus built up and maintained to expel money, postpone payments, and embarrass everybody.

There is no objection to the merchant in this business; he is a necessary and economical agent in finding and opening markets and effecting exchanges, securing to the producer uninterrupted employment at home; and, in transferring a commodity from where it is of less, to where it is of greater, value, he performs a service equivalent to the production of so much value; employing labor and tools of wood, iron, wind, steam, &c, differing in form but not in principle from those employed by the producer himself. Indeed, it is to the merchant we owe the variety and increase of employments that maintain labor and produce wealth; but to the bank of the debt system we owe nothing but obstruction to labor, loss of national capital, bankruptcy, and distress. It is the system, and not the banks, that I condemn, and it is the people, not especially the bankers, who are responsible for it; but it is most especially the duty of the economist and the legislator to speak plainly, and put public opinion right upon this momentous subject.

I have taken occasion to say in these pages repeatedly that commerce consists of an exchange of material and immaterial products upon the simple principle of barter; commodity pays for commodity, and service for service, and the nearer we come to a direct exchange the less is the tax upon both producer and consumer, and the better it is for the community. Merchants and money are necessary to an economical accomplishment of exchanges, but not mere speculators nor a currency of debt. If the natural law of value be not interfered with, business will provide the true and necessary volume of currency for itself in real money; less we cannot have permanently, and more we cannot permanently retain; the debt currency does nothing but sink the value of money, and drive so much money away; it is a false intruder of the most damaging character.

The population of the United States has been estimated of late at 32,000,000; on this estimate the currency as above would be $19.16 per capita; but the progress of the census of 1860 thus far seems to indicate that this is an overestimate of the population; probably the currency at the beginning of the year was $20 for each inhabitant, approximately.

The estimate of $84,000,000 of specie outside of the banks is, I am aware, very much below that of other writers, but I feel very confident there is not over $200,000,000 of money in the whole nation, including the California currency and the hoards. Estimates in round numbers very generally exceed the truth, and are often wild. In the inveterate paper-currency States, like those of New England, where one-dollar notes are in circulation, it is rather difficult to find change for a dollar in the hands of any family; the omnipotent bank note of one to five dollars is everywhere, and is counted upon to buy the smallest commodity; there is a constant running about for change from house to house, and the till of the retailer is poorly supplied. There seems to be a penchant for shin plasters in New England, and money flees from them as from a pestilence. I doubt if there is an average of three dollars of real money to a family in the State of Massachusetts outside of the banks, including the money drawers of the shops, sums in the hands of money dealers, and all reserves outside of the hoards; of hoards, there are a few among the foreign population. In the South, and of course in those States where the circulation of bank bills below the denomination of five dollars is prohibited, there is some money to be found; but I defer considerably to official estimates in placing the average so high as fifteen dollars to each family in the nation, deducting the slaves, and make no doubt it is an overestimate sufficient to counterbalance any amount the slaves may have in possession.

Supposing we have a free population of 28,000,000—an extravagant estimate, I think—and allowing five members to each family, there are 5,000,000 families, to whom I assign $15 each, making $84,000,000. There must be large reserves—not hoards—somewhere, and large sums in the hands of money dealers, travelers, and immigrants, to make up so large an amount as this, outside of the banks; for there is a bank wherever a bank can be planted throughout the country, to gather all the money in its neighborhood. The New York Journal of Commerce ciphers up $283,000,000 in the whole country. I cannot conceive where they find it; but I believe Mr. Snowden of the Mint thinks with me, that $200,000,000 is a large estimate. At any rate, I do not think the money in the currency can exceed the sum I have named. With such a leak as there is in the course of exchange, that we keep almost constantly adverse to ourselves, which is neither more nor less than keeping money cheaper here than elsewhere, specie must run out in ways that cannot be discovered, or brought within the range of statistical investigation.

Some writers have placed promissory notes and bills of exchange in the category of currency, but it is altogether a mistake; their affinity is with circulating property, not with money. They may be exchanged for property, and so might the property upon which they are drawn; and if offered for sale for money they are still more like property; they are exchanged against money, and are more likely to have the effect of increasing the exchange value of money than of reducing it, as they would if they were of the nature of currency. They are, however, neither money, nor currency, nor property, but mere records of an unfinished bargain; the purchase money is not paid, and these are memoranda or written evidences of what the debtor is to do to complete the contract. One species of property exchanges for another; this is barter, the fundamental principle of trade; and when promissory notes and bills of exchange are exchanged for money, they take the position of property as essentially different from money as the goods that were delivered for them, or for the fund upon which they are drawn.

We must clearly understand, and I therefore repeat, that the currency is that, and only that, which ought to be money, and would be if not interfered with by an abnormal legislation that authorizes debt to take its place. The public mind should be disabused as to the existence of capital or value in promissory notes and bills of exchange; then people would comprehend that there is neither money, capital, nor value in the debt currency erected upon them, or into which they are converted, nor in the so-called "bank capital," which stands upon no other foundation. He who buys 1,000 barrels of flour for $5,000, holds the capital in the flour; and if he pays for it in gold, it is an exchange of capital; he has so much more of one commodity, and so much less of another— more flour and less gold—while the flour seller has so much less flour and more gold. If, instead of paying money, the buyer gives his note for the flour, it is preposterous to say or suppose that he creates a value of $5,000, and that the community are in possession of $10,000 of capital because he has run in debt $5,000, and made his note for the same. And now, if the note be exchanged for gold, or hemp, or cloth, or any other property, there is only a legitimate use of credit in the transaction; it may be exchanged fifty times for value received in each transfer without affecting the value of money, or doing any harm; the payee or original holder of the note simply receives gold, or hemp, or cloth, or some other property in exchange for his flour; the note is all the while nothing but a written evidence of the debtor's verbal promise; adding nothing to the volume of gold, or of currency equivalent in use to gold, or to property of any kind. In effect, the whole is legitimate barter; flour being exchanged for gold, and gold for hemp, and hemp for cloth, etc., through the entire circuit of exchanges. I wish to direct attention particularly to this point, and ask for it the most careful consideration, that there is not in this note an increase of anything but debt; there is nothing in it of the nature of an increase of money, currency, or property, and the transfers effected, as I have described, are merely transfers of pre-existing money or property.

But now let us suppose that the note is discounted in bank, and the bank, instead of delivering the material equivalent, money, that is, gold or silver, for the proceeds of the discount, issues its notes, or inscribes a credit to be checked upon as money in excess of the money in its coffers; it is then a very different thing; the act is the creation of debt currency, for which there is no material equivalent; there is no such money or value in existence as the bank promises to pay; and, therefore, although it receives an obligation to return something for nothing, at the ultimate settling day the thing cannot be done; if the bank gets the material equivalent, it belongs to some other obligation that it is required to meet, and somebody must break for it when the bank can no longer maintain the fiction in circulation. The continued existence of this fiction in the currency is absolutely necessary to maintain the price it created in the circulating property, and support the obligations of debt in the circuit of exchanges made by and resting upon it. Its withdrawal by a set-off between the two debtors, the bank and its customer, in the contraction of loans, is inevitable bankruptcy to all these obligations that must fall somewhere upon wholesale or retail dealers within the circuit of its operation, for it is the annihilation of so much currency. But when it is created, being accepted without bargain or question as money, it degrades the value of all the capital of the community invested in money, precisely as much as it adds to the volume of the currency; this is the sure effect of an increase of bank loans. Obviously, if the bank loan is not increased by the discount; if it be merely relending a fund previously in the currency and just paid in, there is neither an increase of currency nor degradation of the value of money in the discount transaction; but I am treating of the principle of the thing, the construction of the debt currency, and I aver that we might as well make a free gift of so much gold to some other portion of the world, as to organize this note into a currency equivalent in use to money, without a special reserve of coin in the bank, dollar for dollar, against the sum placed at the disposal of the party obtaining the discount; it is converting fiction into a currency of price that is not value, and is a dead loss of capital to the nation, excepting so far as it adds to the price of our products in foreign countries, which is inappreciable, as the expelled coin flows into the great ocean of the currency of the world. Its effect is entirely adverse to ourselves, because, by raising general local prices, it checks our production and exports, and brings returns in foreign goods with precisely the whole amount of the fiction of money added to their price, which we must pay in the solid value of gold and silver. Your constant readers will excuse the repetition of this truth, which I have presented in previous numbers of this magazine; it must be repeated, "line upon line and precept upon precept," until our people are fully awakened to its vast importance. It is the absence of money and value in the currency, and of capital thus expelled from the country, that is the cause of the cruel bankruptcy that cankers the life of our businessmen.

With 613 millions of currency at the beginning of the year, sterling exchange was at par, or somewhat in our favor; we were shipping products but no money. Now, late in August, sterling exchange rules against us, and we are shipping money, twice as much as we receive. Are we short of exportable produce? Certainly not; there is an abundance of it that we want to sell; but we have expanded the currency and cheapened money; 613 millions is no longer the volume of the currency. The city banks of New York and Boston alone have since increased their loans $11,000,000, and the Northwestern States are breeding red dogs and wild cats as fast as possible; new banks are going into operation in all directions, and there is a general expansion of the debt currency, with the single exception of New Orleans, while the increase of gold would expand the currency more than fast enough. There is now currency enough to maintain the prices of many exportable products above the exporters' limits, and to turn the export demand to that extent upon gold and silver—just enough of currency to sink the value of money for the amount of the export of specie. The volume of currency is now above the specie measure, and no human statute, unless by destroying a portion of the debt currency in the contraction of loans, can prevent the excess from being exported in solid money. Who does not see, if we exported merchandise to the amount of $50,000,000 instead of gold, that we should have room for the reproduction of 50 millions more of merchandise; and that we should reproduce it, leaving the money in the currency and so much more capital in the nation, than we shall have by the present destructive policy at the close of the year? We want the business of exporting this 50 millions and of producing 50 millions more of merchandise, and the relief from debt that would come with the accession of so much capital.

But the so-called balance of trade is now against us. The "balance of trade" is a chimera; money is cheapened by an increased supply like beef, and is exported like beef when it is cheaper here than in the foreign market. It is perfectly in the power of a few gentlemen who control the New York City banks, to turn the so-called balance of trade in favor of the United States in six weeks, and, if judiciously managed, without any considerable disturbance of prices; excepting perhaps among the fancy stocks in Wall Street. The clear reduction of six or seven millions of bank loans would reduce the volume of currency one per cent, and general or average prices one per cent, but for the continued supply of California gold; and even with that, a reduction of seven millions in six weeks would so enhance the exchange value of money as to reduce sterling exchange below the par rate of 9½ per cent. This is not a mere conjecture, but a matter in which the country has had practical and ample experience, and which intelligent bank directors understand perfectly well; then the "balance of trade" would be in our favor, and we must export merchandise instead of money.

The vast power of regulating the value of money, and thence the commerce of the United States, is very properly delegated by the States to Congress in the Constitution; it is the chief function of sovereignty, without which, the stipulation for regulating commerce, as well as that for maintaining the inviolability of contracts, is an utter nullity.* But, by reason of the neglect of Congress, this great function is given over to the cupidity of the banks; and to suit first their profits and then their necessities, the value of money is first degraded, then enhanced; the import of foreign goods is, by the same process, first stimulated, then checked; the production, as well as the export, of our domestic merchandise, is first diminished, then increased, inversely as the increase and diminution of the currency; the government revenue is first over-supplied to a surfeit, then depleted to starvation; the people are first thrown into debt for a huge sum in price, and then compelled, by the inevitable fall in the money value of their assets, to settle the whole sum of price in their obligations, above value, in bankruptcy. Indeed, the chief object of the business of the nation, or of its conduct, seems to be first to make dividends for the banks, and then save them from the consequences of their cupidity in the suspension of specie payment; while the prosperity and happiness of the people are of secondary consideration, or of none at all. This mighty power over the public welfare is now practically exercised by a few gentlemen who control the discounts of the leading banks of the city of New York, the creditor city and center of the exchanges of the nation.

It would be no hardship to the banks of issue to be converted into "savings banks," and compelled to borrow all they lend in excess of their capital, paying interest on deposits, and making their support and profit out of the difference between the interest they pay and the exchange and interest they receive; because there would then be no limit to the loans in excess of their capital; then they would get money without creating a fictitious currency. I presented a statement of this principle of banking in your issue of May last, showing its practicability and profit. The public would be protected in this principle by the bank capital, of which there is none in the present savings banks; and the capital would be real, which, to a very great extent, it is not in the present banks of issue. It is in effect bullion banking, although the circulation may be in checks and certificates, the deposits being borrowed on stipulated time, and the loans being carefully averaged to be returned before the deposits fall due. There could be no contraction of the currency in this principle of banking; on the contrary, there would be a continual and normal increase of the currency by and with the increase of circulating property; the only way in which it can be steadily or profitably increased. The banks would be under no immediate liabilities without coin in reserve, dollar for dollar, to meet them; for the undrawn loans would be retained on special deposit, with the fund belonging to the circulating certificates, in coin not to be loaned again, while its ownership exists in the loans and certificates. It puts an end to the present unjust and ruinous principle of lending the same dollar several times over, upon which the banks now make their support and profit, and which is absolutely necessary to their existence under the present system.

Finally, it would soon add $450,000,000 of real money to our working capital; make the United States, in excess of imports, the greatest exporting nation on the globe: put an end to our "panics" and commercial revulsions, and New York would infallibly become the center of the exchanges and the leading city of the commercial world.

Such is the vast importance of this currency question. If Congress should think that existing charters, which completely override the constitutional power of regulating commerce and the value of money, are still too sacred to be annulled, they can at least put a stop to their further extension, and to the creation of any more debt currency, by prescribing a limit to the bank loans of each State, and prohibiting the establishment of any more banks to create a fiction of money and lend what has no existence.

I trust the government will never again attempt to be concerned in the business of banking; but, in the exercise of their constitutional control over commerce and the currency, Congress can further the business of bullion banking, which is the only means of regulating, and the only security for both, by establishing a safe depository for coin in the hands of commissioners, independent of the treasury, and beyond the control of the treasury officers, with authority to issue certificates therefor of convenient denominations to furnish a portable, secure, and convenient national currency, to save the loss by abrasion and other cost of handling and of transporting gold. The government must be responsible for the safekeeping of the coin, dollar for dollar, against all outstanding certificates, with a positive restriction of its power to remove the deposits from the custody of the commissioners. The certificates should be payable only where the deposit for the same is made, leaving to bankers and merchants the business of removing the coin on presentation of the certificates, when the same shall be required. But the bullion or coin must be kept, at any cost of vaults and bolts and responsible custodians, while its ownership circulates; otherwise it is utterly lost to the nation.

This important subject needs a leading mind in Congress. Is there not some member who will make it his specialty and attend to it? In no other way can he do his country such essential service.

*Strictly speaking, no human government can regulate the value of money, excepting by restraint upon any interference with it. Money may be diverted from its true course, or obstructed in its natural flow, like the current of a river; and it is vitally important in the matter of money that government shall prevent such diversion and obstruction. It can have no other power to regulate the value of money. Coinage is simply inspection.

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