Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
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Chapter 2
The Gold of California and Paper Money
(Reprinted from
Hunt's Merchants' Magazine and Commercial Review, XXXV (Aug., 1856),
160-72.)
FREEMAN HUNT, Esq., Editor of the Merchants' Magazine, etc:—
The admirable article in the May number of your Magazine, on "the Gold
of California," by the Hon. Thomas G. Cary, of Boston, deserves the careful attention
of all who desire information as to the great movements which operate upon the commerce
of the world, and influence the life and well-being of individuals and the nation.
Gold is a lever of immense power in moving the fabric of society, the action of
which should be understood by every businessman, at the cost of some study, for
a higher purpose than his own immediate traffic or selfish ends. The custom of ages
has so identified gold with money, that we have come almost to consider it as nothing
but money. As money it is in everybody's thought, on everybody's tongue, and in
many hands; but thought about, talked about, and desired as it is by all, it is
as little known, or as poorly comprehended in its character of money, as if it had
been appointed to that office by the present Congress of the United States. It is
said that we, of this country, worship the almighty dollar. Surely, it is best to
know whether our deity be a God or a devil.
Much has been written about gold since its discovery in California; but most of
the writers have so involved the subject in the metaphysical mists of political
economy, that common men can derive very little assistance or knowledge from their
labors. It is, therefore, refreshing to meet with a good, plain, comprehensive essay,
like the one in question, adapted to the purpose of instructing the many, and to
the many I commend it for its practically plain teaching, and generally sound doctrine.
The purpose of Mr. Cary appears to be, mainly, to explain why the anticipations
of a great rise of the prices of all property, from the influx of gold, have not
been realized, and to show that gold is not an important addition to wealth, excepting
as it is used for utensils or ornaments, or necessarily as an instrument
of exchange.
With reference to the anticipated rise of prices, he relates the experience of a
"merchant of sagacity," who, having $100,000 employed in loans on short time, invested
it in property, from an apprehension that the influx of gold would reduce the rate
of interest, and raise the price of all kinds of property rapidly. Sagacity is a
relative term. We may not doubt that the merchant in question possessed the attribute
in the comparative degree in this community, where so little is known of the true
character of money, that we suppose its efficacy to be improved by adulteration,
and its strength increased by weakness; but his sagacity failed him in this instance.
The stocks fell, while interest rose and ruled high—8 to 15 per cent.
If he had carefully examined the history of money, and compared the periods of high
and low prices in this country and elsewhere, he would have discovered that interest
is always high when and where the prices of property are high. In other words, interest
is always dear where money is cheap. Gold runs away from those countries where interest
is high, to countries where interest is low, and flies from paper money as mankind
flee from a pestilence. We can do nothing so effectual to raise the rate of interest,
as to increase the quantity of money, whether metallic or paper; but more especially
of paper, for that is debt, having the preference of every other debt. It is the
debt of institutions holding the purse-strings of society; in every adverse state
of the exchanges, turning the screw upon all other debtors, and raising the rate
of interest with irresistible power. California furnishes an example of a high rate
of interest, with a plenty of gold, and consequent high prices of property. Our
Atlantic States, where money is made plenty with paper, come next, and the rate
of interest continues to decline, successively, in England, France, &c, to those
German States and the Eastern countries, where money is the least abundant, but
exclusively metallic and most valueless; and the precious metals are traveling in
the direction indicated by the declining rate of interest with the steadiness that
belongs only to the operation of a natural law.
Mr. Cary very justly says, that "currency, like water, seeks a level, and the gold
of California becomes mingled with the metallic currency of the world. If prices
rise here, because our gold is falling below its value in Europe, some of it will
be taken away to Europe till prices will cease to rise with us." Plainly, gold will
go where it is worth the most, and the only way in which the worth of gold can be
measured or determined is by the general price of commodities and property. This
fact is rendered somewhat obscure to many minds by the term dollar, which
means but a given weight of gold or silver. If we fix the mind upon gold by the
ounce, and consider the exchanging of it for cloth or cotton as simple barter, which
in fact it is, we shall find that having on hand cotton, corn, ashes, gold, copper,
lead, silver, &c, that commodity will be taken for export which is the cheapest
here and the dearest abroad, and we thus better comprehend that the dollar, being
but a commodity consisting of 25 8/10 grains of gold, must follow the same law.
If 20 bushels of corn, 1 ounce of gold, 100 pounds of copper, and 5 yards of broadcloth,
are equivalent value in England, and the English merchant having broadcloth to sell
here, can lay down in England 21 bushels of corn, or 101 lbs. of copper, or 1 ounce
of gold for his 5 yards of broadcloth, he will leave the gold and take the corn
and copper. If he can obtain 1 oz. 1 dwt. of gold, but only 20 bushels of corn,
or 100 lbs. of copper for his cloth, he will take the gold. Either of these articles
is virtually the measure of value of the others; 20 bushels of corn being, in the
case supposed, as truly the value of 1 oz. of gold, or 100 lbs. of copper, as 1
oz. of gold ($18.60 in our coin) is the price of 20 bushels corn, and so of the
rest. Therefore, if by reason of our increased supply of either of these articles
more of it is required to be given in exchange for the other than before, that article
has fallen in value, and if it be cheaper here than in England, by more than the
difference of cost of transportation, it will be exported to England, and it will
be distributed to the ends of the earth on the same principle. There is no magic
in gold to release it from the operation of this universal law. The average rise
of prices and fall in the value of money, are, consequently, one and the same thing,
and must permanently bear a just relation to the increase of the precious metals
upon the stock of the world.
What the sum of this increase, and consequent rise of prices may be, Mr. Cary does
not indicate; and I think the reader might infer from his essay, that the rise of
prices has been very small, but a careful comparison of the prices current of 1849
and 1856 seems to show that it has reached 20 to 25 per cent on the prices of 1849,
as nearly as such calculation can be made, including real estate and rents.
Bringing the estimates of Humboldt, Gallatin, and other reliable authorities, down
to 1849, when the California gold came into commerce, the whole stock of the precious
metals appears to have amounted at that time to about $500,000,000 in the world.
Since that period, the increase for the whole world cannot greatly have exceeded
an average of $150,000,000 per annum. Allow the excess for abrasion and contingent
losses, and the increase would amount to 3 per cent per annum; this compounded for
seven years gives an increase of 23 per cent.
Dry hides, a large and important article of commerce, have risen during this period
in this country from 8½ to 26½ cents per lb., and in like proportion in all other
commercial countries. Store rent in favorable locations is 100 per cent, and flour
and grain were, when Mr. Cary's article was penned, about 50 per cent higher than
in 1849. Now, if some things have risen so enormously, it follows that other things
cannot have risen at all, and some may be worth even less than in 1849; otherwise
the sum of money, with only 23 per cent increase, would be insufficient to settle
the balances of trade. This deviation of value, among the various commodities, in
relation to each other, may be caused by speculation, but it is usually the result
of the common law of consumptive demand and supply. Money always finds customers,
because of its power to exchange readily for everything else; consequently, there
is no limit to price but the limit to the quantity of money. If one commodity rises,
another must fall, to make room for it in the currency; and if one falls, another
will be sure to rise, for, with rare exceptions, the great mass of the currency
is always in use or in immediate demand. But deviations of this sort occupy public
attention too exclusively, almost totally obscuring the effect of the expansion
and contraction of the currency, exhibited in the aggregate rise and fall of the
prices of property in relation to money, a vastly more important matter, causing
more rapid and extreme deviations of price, and involving the consideration of the
proper administration of the monetary system of the country. But such extreme deviations
could not occur from the use of specie alone.
Obviously, the increased supplies of gold, coined into money, become mingled with
the currency of the world, and prices will be averaged accordingly.
Precisely the same consequence results from the increase of paper money; fitful
and mischievous only—never permanent anywhere, because, being nothing but debt,
it cannot be long sustained beyond the sum of specie property belonging to the local
currency with which it mingles.
The simple illustration before presented in the exchange of corn, gold, copper,
etc., which some may think too simple to offer to an intelligent reader, is of the
greatest significance, for it proves conclusively that we do not have any permanent
accession to the currency, by reason of paper money. All we can use of paper and
of credit discounts on deposit, permanently, must occupy the place of the
same amount of specie, thereby driven abroad, the export of which takes the place,
and prevents to the same extent the export of corn and of flour, that sour on a
glutted market at home, or of other exportable commodities, the production of which
would furnish profitable employment to the laborer, and give use and value to land
and other property, now neglected, and perhaps unknown. More than this can only
be put in circulation temporarily, to be cut down by the more lively outpouring
of gold, till the currency is again reduced to the amount required within the specie
measure, and the amount of paper thus remaining and substituted for specie, costs
the labor of the country interest, and something more for the benefit of the banks—robbing
Peter to pay Paul—while the use of specie would be a common benefit, costing nothing
beyond the labor of its production, which must be supplied in either case. When
the export of gold entirely ceases, we may reasonably conclude that the average
price of merchandise is at specie value here, and the amount of the currency the
same as it would be if no bank note or credit deposit existed.
Mr. Cary considers that gold is not an important addition to wealth, with the qualification,
"excepting as it is used for utensils or ornament, or necessarily used as a mere
instrument of exchange." As he admits that we had gold enough for all such purposes
before, it follows that he does not consider the present increased supplies of gold
any important addition to wealth at all. He does not state this as distinctly as
could be desired, but his illustration of this point is good, and to the purpose.
"The blacksmith and the carpenter contribute largely to the wealth of the community,
but the head and the hand of the artisan are not wealth, however they may be productive
of it, although the hammer and anvil, with the saw and plane, are also wealth to
the extent of the necessary cost of such tools. But if the smith should spend his
substance in procuring fifty or a hundred anvils, when his business required only
the use of one, and there was no market for the rest, he would hardly be thought
to have increased his own wealth or that of the community by the addition." This,
it appears to me, is precisely the principle of our doings in California.
There is a distinction generally unnoticed or unknown, that it is most important
to observe for the proper understanding of this matter, namely, the difference between
value and price. Value is the power of a commodity or of property
to exchange for other property, and is in the compound ratio of the utility and
scarcity of the property valued. Price is simply the power of property to exchange
for money. A bushel of corn at $1.00 is of equivalent value with 5 lbs. of butter
at 20 cents per lb., or 10 lbs. of lead at 10 cents per lb. Now, if the quantity
of money should be doubled, while the supply of and demand for the other articles
remained the same, their price would probably be doubled, but their value would
remain unchanged, for each would exchange for the same quantity of the other as
before, and for the same quantity of all other property as before. Either would
purchase double the quantity of money; but as we could neither eat, drink, nor wear
the money, nor do anything with it but exchange it for other property, the sum of
$2.00 would be of no more value than $1.00 was before. Money, then, would have fallen
in value 50 per cent, but property, though increased in price 100 per cent, would
have no additional value; for it would not, by reason of the greater price, supply
an additional human want. Obviously, then, the mining of gold in California is labor
lost to the country and to the world, so far and so long as its product is used
for money; and its use for ornament and utensils, being for the gratification of
luxury or vanity, is of the least possible consequence; therefore, we may safely
conclude that the universal supply of gold is not an important addition to wealth.
Thus far, excepting the matter of paper money, which is not embraced in his essay,
I accord with Mr. Cary fully. But almost every subject admits of an honest difference
of opinion, and I find room in this for such difference from some of his opinions.
He thinks the high prices said to be caused by gold are more properly attributable
to the emigration to California, which diminished the number of valuable laborers
here—to wants of flour and grain in Europe, and to two years of unusual drought
here. The two latter are good reasons for the enhanced price of particular commodities,
and so far as their increased price taxes labor it would affect in some degree other
property, and raise its price, but not, I think, to a great extent. They are the
ordinary fluctuations of value from variations of supply and demand. There must
be a large increase of money to supply any considerable general increase of the
prices of all property, or the enlarged balances of trade must produce bankruptcy.
But as to the emigration, I think it could have had but a very temporary effect
upon prices, if any at all.
A small community may be able to produce property as cheaply as a larger one. The
element of consumption combines with production in determining the economy of labor,
and the wealth of individuals and nations. Every man has all other men for his competitors
in production and traffic, yet by industry and frugality he may keep the balance
of trade in his favor and accumulate wealth.
And here let me travel a little out of the record to correct a common misapprehension.
It seems to be forgotten or disregarded by most thinkers on the subject, that the
labor of every community vastly exceeds what is required by the necessities of life.
Probably one-twentieth part of the labor performed in the United States would feed,
clothe, warm, and shelter the whole population, and perhaps put us in possession
of all the plain comforts enjoyed by the community of Shakers; the remainder, of
nineteen-twentieths, goes to the support of luxury, pays for silks, satins, and
jewels; for war and intemperance; maintains the government; builds palaces and monuments;
creates beauty and refinement; supports religion and literature, idleness and pauperism,
theaters, fiddling and dancing, and folly in general. Some persons have been startled
at the statistics of intemperance—its enormous cost. Why, we very wisely spend one
day in seven for the sabbath of perfect rest. We might institute another sabbath
of bacchanalian orgies, and most unwisely rest another day of every seven in the
gutter, pay for the necessary liquor, and have abundant means left, not only to
support the whole population, but to keep the balance of trade with other nations
in our favor, if we would traffic with them in an equally valuable currency.
The measure will not be recommended by me, nor obtain my support; but there is not
a nation with whom we hold commercial intercourse, that does not waste in war, ignorance,
idleness, and in the support of abnormal institutions, contrived by the cunning
and established by the strong to compel a luxurious and profitless maintenance from
the hands of labor, more than such a bacchanalian sabbath would cost, over and beyond
any waste or idleness here. We are not wholly without such abnormal institutions,
but they are comparatively few and harmless. The worst among them is our banking
system, which substitutes debt for useful, constitutional currency, as I have already
shown, and gains its support and profit from the labor of the country, for doing
nothing but mischief.
No nation known to history has ever been so generally industrious, or applied so
much intelligence and power to the creation of wealth in proportion to population,
and the result is manifest in the most rapid and vigorous material progress the
world has ever witnessed.
"Large numbers of people left useful occupations here, and went to California for
gold. Probably 50,000 men," in Mr. Cary's opinion, "whose labor was of great value,
left with this object. But many vagabonds went with them, who were no loss here,
and did nothing but mischief there." I can conceive that the sudden withdrawal of
many valuable laborers may have temporarily enhanced the price of labor in the trades
they deserted, but their places were soon filled; some departments of less profitable
labor supplied the trades that paid best. Boys are growing to men all the time,
and such matters soon regulate themselves. Under such circumstances, we might have
for a time a smaller community, less consumers— profitably less so far as the vagabonds
are concerned—as well as less producers; and there would be a diminished supply
of articles of the least necessity—luxuries probably—perhaps fewer fiddlers, players,
or organ grinders, but there would be "a few more left." It is impossible to employ
the whole population in productive labor; they would soon overstock the market with
useful things, and then some would be obliged to take to fiddling to gain a living
and make themselves useful as consumers. This would seem to be all the effect the
emigration to California could have produced here. I cannot think it had any but
a momentary influence upon prices. I must therefore differ from Mr. Cary on this
point, and conclude that the high prices are solely to be attributed to the increase
of gold, disproportionate with the production of other capital.
He thinks if such were the fact that money should be more abundant than it is, and
the rise should be nearly uniform. Paradoxical as it may appear, the more money
we have in this country the scarcer it is, according to the common mercantile idea
of the scarcity of money. The currency never was so full before as in 1837, when
money became so scarce that the banks of the United States suspended specie payments.
Speculation and overproduction grow with the increase of money; prices rise so that
we become large buyers, but small sellers, in our foreign trade. The demand for
money outruns the supply, no matter how great the supply may be, and competition
keeps up the prices to the full measure of the currency. Overproduction, which should
reduce the price of its special commodities, furnishes merchandise for speculation.
When the currency is increasing, perishable articles are held till they decay. At
such time the producers or holders of breadstuffs in the West always expect prices
higher than the highest, and corn and flour sour before being thrown upon the market.
They tell the jobber in the city that they cannot pay because they have not sold
their wheat, and the jobber extends the credit because he can get a discount at
the bank—fly kites—and pay an old debt with a new one.
Thus the demand for money is the greatest when money is really the most abundant,
and debt is increased, creating customers for money and disquieting the whole community.
Nobody is benefited by this state of things, but the bank-owner and capitalist;
they get the best security and the best pay, and when settling day arrives, the
banks, being themselves the great debtors of the community, control all the money
and take care of themselves. Their bank notes and deposits, which we have been foolish
enough to consider and use as money, now show themselves in their true character
of preferred debt; it must be paid, and the contractions of bank "accommodations"
necessary to enable the banks to do this, and the consequent reduction of the currency,
must continue till the value of money is increased, and the prices of property reduced
to the true level of specie measure. At any appreciable amount below this point
merchandise will be received by creditors in preference to specie. It begins to
pay to export merchandise again, and having settled among ourselves the whole sum
of the contraction by bankruptcy, we make haste to forget it and the widespread
misery it occasioned; the newspapers read us a few wise lessons on the subject of
overtrading—the great benefit of such painful experience—say a good deal about the
prudence that is now to regulate the concerns of trade, and then we are driven by
the system (it is a mistake to suppose that we go voluntarily) round the same unhappy
circle again, grinding the masses to poverty, and filling their hard earnings into
the coffers of those who manage the currency.
What Mr. Cary means by the greater or less abundance of money is, doubtless, the
common understanding of the term on 'Change, as I have here considered it, that
is, more or less plenty in relation to the demand. It can hardly be supposed that,
according to the natural law of the case, which he understands so well, that "currency,
like water, seeks a level," he would expect any greater increase of currency in
the United States than has already taken place.
For the reader's information respecting this I furnish the following comparison
between the two periods of 1849 to 1856—
|
In 1849— |
Bank Circulation |
$114,743,415 |
|
|
" Deposits |
91,178,623 |
|
|
Specie in Bank |
43,000,000 |
|
|
" " Circulation |
77,000,000 |
|
|
|
|
|
|
Total of Currency in 1849 |
|
$325,922,038 |
|
In 1856— |
Bank Circulation |
$177,157,412 |
|
|
" Deposits |
237,964,981 |
|
|
Specie in Bank |
60,000,000 |
|
|
" " Circulation |
190,000,000 |
|
|
|
|
|
|
Total of Currency in 1856 |
|
$665,122,393 |
|
|
|
|
|
Excess of 1856 |
|
$339,200,355 |
The specie estimates are taken from the Report of the Secretary of the Treasury.
This is an enormous increase of currency—over 100 per cent in seven years—a greater
ratio than ever before, excepting for the seven years prior to the disastrous 1837;
and notwithstanding the great influx of gold, it indicates, in my opinion, a state
of inflation. The gold received, instead of passing into the currency, is used as
the means of expansion by the banks, their debt to the community being increased,
and the specie thereby expelled. As we see by the above statement, they hold but
$14 45/100 of specie for $100 of immediate liabilities. In 1837, they suspended specie
payments with $13 71/100 of specie for 100 dollars of immediate liabilities, being
only ¾ of one per cent more than their present condition. I am aware that the increase
of gold makes a present difference in their favor.
According to Mr. Cary, a great deal of the California gold belongs to foreigners,
and "is sent first to New York, merely as the most convenient channel for it, and
not because it is due to us." There can be no doubt of this. Since the gold came
forward freely from California, say for the last five years, 1851 to 1855 inclusive,
we have exported nearly $200,000,000 in all, or $40,000,000 per annum. As the total
receipts have been but about $50,000,000 per annum, during the same period, and
we furnish the great bulk of the shipments to California, it is probable that not
more than $10,000,000 per annum of the gold belongs to foreign account. The balance
of trade in merchandise is therefore against us $30,000,000 per annum. Now, in
my opinion, we lose this, virtually getting nothing for it. By reason of the paper
inflation of our currency, we pay false or paper prices for imports, and for the
same reason many things that England and other countries want are produced here
at too high cost to export, or are not produced at all, and land and labor are lying
idle that would otherwise be profitably employed, while breadstuffs and other commodities
are being furnished to England by the ports of the Baltic and Black Sea; and various
nations, by using a better currency, are enabled to undersell us in the different
markets of the world.
If we measured our values by a currency as good as theirs, our commodities would
be cheaper to Europe than gold; and their gold, which now passes through New York,
might be arrested here, and form capital for the further employment of labor and
the further extension of trade. Indeed, there can be no doubt that with an unmixed
specie currency, and our greater general industry, we could turn the current strongly
in our favor, and draw gold from Europe as freely as they now draw it from us, until
values should be brought to a level, when the advantages of trade would be equal.
All we need to accomplish this is, to know, and to act upon the knowledge, that
adding $5 of paper money to $10 of gold, reduces value as much as it adds to price;
that the sum of ten dollars is precisely the same value as fifteen dollars, when
it will buy the same property, and supply the same wants of life, and that one-tenth
part of the money we now employ would move the same property, transact the same
business, build the same cities, and command the same capital, as a whole, only
at a lower name in money, and it would be the same wealth. As our currency now operates
upon our foreign traffic, we might as well plunge $30,000,000 of gold annually
into the sea.
The true policy for every nation is to keep the currency sound and strong. As gold
and silver form the acknowledged money of the world, we can do no better than to
use them in their standard purity, and permit nothing to be acknowledged as a dollar
that is not a dollar. The addition of $5 in paper to $10 of gold has the same effect
in reducing our money as adding one-third more alloy to the coin; it reduces the
eagle to $7.50. Reversing Iago's simile, it filches from the eagle $2.50, but leaves
its good name unsullied. And we ought to know that a "promise to pay," either of
a bank or an individual, so far from being money, is a debt that must be paid, and
will be sure to come in for liquidation at the most inconvenient moment. The scarcer
the real money may be, the faster the imaginary money—the "promise to pay,"—will
return for settlement, and thus paying both sides of the billbook—payable and receivable,
an operation that cannot be long continued—are debtors driven to the wall, and bankruptcy
and distress spread broadcast over the land.
The principle of our mixed currency is a philosophical injustice. It is of unequal
value to debtor and creditor, and to buyer and seller. As we say in technical language,
its elements are not chemically combined, only mechanically; they do not permeate
each other, as the alloy and other metal in coin, but are laid together in pieces
of gold and pieces of paper, so as to be easily separated by the creditor; the gold
retained and the paper thrown aside. Thus the seller having a commodity produced
elsewhere by a given amount of labor and capital, represented by $5 in gold, finds
here the same capital and labor represented by $6 of a mixed currency. He sells
us the value to himself of $5, and takes $6 away for it, first separating the paper
from the gold, and taking only the gold. Obviously we must be large buyers and small
sellers upon these terms; and if we sell at all, must supply one-fifth more labor
or capital to get back the same sum of gold or the same intrinsic value of anything
else. It is in this way that we live and thrive, by laboring for the same capital
more generally, intelligently, and industriously, than any other people; spending
extra time in hard work, which is lost in our exchanges with countries possessing
a better currency.
Now, if our coin were debased and chemically combined with 20 per cent of pewter,
or some worthless compound, the seller or creditor would be obliged to take away
the whole mixture, and the exchange would be made on an equivalent value—gold for
gold. The creditor or the seller would receive no more gold than the due proportion
in the currency, and would allow for no less, and no injustice would be done to
either party. The trick of mixing currency is that the seller from abroad gives
only $5 of his gold or labor for $6 of ours, by reason of the facility with which
the gold is separated from the paper, a jugglery in the system not understood by
the people. I assume this position merely for illustration, not pretending to say
that the currency can be permanently debased by paper one-sixth, and kept
convertible, although it may be so debased temporarily.
I have said that one-tenth part of our present money would answer every purpose
of the whole; still less would answer equally well. There is no limit to the reduction
that might be made, and with sustained prices, if the weight or fineness of the
coins should be reduced in the same ratio, until a degree is reached beyond which
the divisibility of the metal would not admit of expressing amounts sufficiently
small. With the coarser metals—silver and copper—to fall back upon, this could scarcely
occur. But such a measure would cause endless confusion in the value of coins of
the old weights and standards that could not be immediately withdrawn from circulation.
The true policy in every variation in the supply of metals is to keep the coins
permanently of the same weight and fineness, letting the prices of property change
as they may. To secure perfect accuracy and justice in this matter is impossible.
One metal will vary in relation to another. The decrease of the precious metals
or of the currency injures debtors, and their increase injures creditors, most especially
annuitants, and in a great degree laborers and salaried men, for wages are the last
things to rise as the currency falls in value. I do not, therefore, see the propriety
of the following remark of Mr. Cary, and it does not seem to agree with his general
teaching: "With the use of steam for manufactures and navigation, of railroads,
of electric telegraph and other modern inventions, nations are roused to an activity
in the arts of civilization that may require vast additions of the precious metals
for circulation." I cannot think so. It is true that a great increase of property,
with no increase of money, would necessarily reduce prices, but that would be no
more unjust than the advance of prices from the present increase of money. It would
not affect unfavorably a different class—debtors instead of creditors—and annuitants
would be benefited, as their income would be relatively more valuable. But no conceivable
increase of transactions or of property, it appears to me, can render any great
additions of the precious metals necessary.
This notion that trade requires more money is the fallacy upon which our paper-money
system is erected, from a blind ignorance of its principles, and an unwillingness
in the community to submit to any fall of prices; but, as I have already shown,
it is not money but debt that is thus created, and the fall of prices, under the
screen of this system, that succeeds every rise, is doubly severe, for the money
that the community count upon to discharge their obligations, is not only abstracted,
but, being of itself a debt, requires for its payment just as much more, precisely
as any two debts of equal amount require twice as much money as one to discharge
them.
I think it was in the year 1836 that several of the leading merchants of Boston,
alarmed at the immense amount of commercial engagements running to maturity, and
the inadequate sum of money in the community to discharge them, and impressed with
the fallacious idea that bank debt is money, petitioned the Massachusetts Legislature
for the charter of a bank, with a capital of $10,000,000, to enable the people to
discharge their obligations. Even the prominent and judicious firm of Perkins &
Co. were among the applicants for this charter. Such was then the delusion upon
this subject. The establishment of a bank with such a capital, for such a purpose,
at that time, would have been like an attempt to extinguish fire with oil, and it
is somewhat surprising that the Legislature, under the solicitations of such esteemed
and practical merchants, should have had the penetration to discern the truth, and
the good sense to refuse the grant, as they did, by reason of which the State was
saved from much additional embarrassment in the disastrous period which immediately
followed. We cannot be too emphatic in denouncing the idea that an increasing trade
necessarily requires an increase of money, as an error and a delusion. It might
be otherwise if value and price were the same, but as the value of property may
be the same at a very different price at different periods, it is of very much less
consequence to alter the quantity of the currency to suit the altered conditions
of trade, than to restrict trade to the proper values of a stable currency. Indeed,
to accommodate the currency to the continual fluctuations of trade, so as to regulate
prices, would be utterly impossible; while if the currency be let "severely alone,"
trade will accommodate itself to the currency with perfect equity. Debtors and creditors
must always be more or less affected by the increase or diminution of the currency,
and so they must be by the increase or diminution of commercial transactions, that
alter prices by requiring greater or smaller quantities of money to represent and
adjust them. They must take their chance in the revolutions of the wheel of fortune.
But if there should not be another ounce of the precious metals raised for a century,
trade would not suffer, nor the supply of any want of the community be in any degree
affected thereby, unless some ornament or utensil of gold or silver, the value of
which would be necessarily represented by more of other property than now. Prices
would fall, but only gradually, or trade increased, and not perpendicularly,
as during a severe bank contraction. Values would be the same as now, and would
fluctuate the same, depending upon the supply of and demand for each particular
commodity. The same quantity of wheat or beef would feed the same number of men,
who would build the same sort of house or ship or railroad. What if at one-half
the price? Would the house, or ship, or railroad be less useful, because of the
lower price, and if the one-half price will buy the same quantity of wheat or beef,
or anything else, pay for the labor and support of the same number of men then as
the whole price now, is it not clear that its value will be the same, neither more
nor less?
So much of repetition of this idea, I trust, may be pardoned by the reader, for
it involves the whole question of the currency so necessary to be comprehended,
and so little attended to, respecting which I find Mr. Cary's article, although
treating only of gold, highly suggestive. But the present condition of things clearly
indicates that the addition of the precious metals for a long future period will
far exceed the relative increase of trade, so that, without the aid of paper money
or credit banking, prices, however they may fluctuate at times, must in the aggregate
surely rise. It is deeply to be regretted that this certain effect cannot be foreseen
by the majority of our people and legislators, and thus remove the excuse for credit
banking, which rests wholly upon the false presumption that the constitutional currency
is insufficient to supply the medium of trade.
But several of the States of Europe are running deeply into the folly of credit
banking and paper money; and the "credit mobilier" is covering the Continent with
debt. This will place them at a disadvantage in their trade with England and this
country, if we do not pursue the same folly to the same extent. I learn from a German
merchant, connected with Hamburg, that already prices have risen there, so as to
embarrass their export trade, and that interest, which was formerly two-and-a-half
per cent, has been of late 6 and 7 per cent per annum.
The bonds of the "credit mobilier" are, of course, expressed in currency, but a
house is not a given quantity of francs and centimes, and when those bonds, given
and received for houses, stocks, and other property, become sufficiently numerous,
and the holders find it necessary to realize to meet the increasing money engagements,
to which the immense transactions of that society are giving rise, they will be
thrown on the market in large numbers and amount, and although payable only at the
expiration of ninety years, they will be likely to create a pressure for money that
will destroy their own value, for they, like all other property in movement, will
require money for their exchange, and they can only command the share of the currency
that belongs to them according to their value or price in proportion to other property
moving in the market at the same time, for all of which the supply of real money
will sooner or later be inadequate. But the whole system is running to debt and
inflation, and by raising prices in Continental Europe, we may expect that the people
there will be compelled to perform extra labor to balance their trade with us, as
we have done under our banking system to balance ours with them, till the bubble
bursts, as similar bubbles have burst before.
That prince of financial mountebanks, John Law, in the beginning of the last century,
forwarded his celebrated scheme for a land bank, essentially upon the same idea
as the credit mobilier. He proposed to coin the whole landed property of the kingdom
of France into money, by getting it pledged for his bank notes, and finding an easy
instrument in the regent—the spendthrift Duke of Orleans—he succeeded in coining
nearly the whole property into debt, and plunging the kingdom into the most inextricable
financial confusion. The preternatural excitement in business which attended this
scheme required a great addition to the currency, at the same time that the bank
notes, under the operation of the natural law by which an inferior always drives
before it a superior medium, forced the coin rapidly from the kingdom, and a grand
explosion, at the end of four years, terminated the existence of the mammoth absurdity,
with the fortunes and happiness of great numbers of the best people of France.
The extent to which the present French Emperor is involving his nation in debt—the
concern of himself and his ministers, or the men connected with him in the "credit
mobilier," and the enormous stock-jobbing and speculations now being carried on,
through the instrumentality of that society, lead prudent men to doubt whether Louis
Napoleon is a less extravagant man or a better financier than the credulous Duke
of Orleans, and to anticipate for France, at no distant day, a climax of commercial
and financial embarrassment little, if any, inferior to that produced by the necromancy
of Law.
If I have engaged the reader's attention in the foregoing pages, I trust he may
be convinced:—
That a merely local increase of money cannot be maintained, excepting
by productive labor, which requires as it earns money; and that increasing the currency
of the United States in any other way is like pouring water into a full vessel to
run over as fast as supplied into the broad ocean of the commerce of the world.
That the present influx of gold is no addition to wealth, so far as
it is used for coin, because the increase of money is all expended in price, adding
nothing to value; so far, therefore, the mining of gold is labor lost.
That the increase of gold for ornament and utensils is not an important
addition to wealth.
That interest is always dear where money is cheap; interest being the
rent of loanable capital, bearing no relation to the value of money.
That there is great disadvantage and loss in credit banking or paper
money, because it checks productive labor, by forcing unnaturally the export of
gold in the place of merchandise, and by its necessary contractions, causing bankruptcy
and distress, making the rich richer, and the poor poorer.
That the aggregate rise of prices and fall of money are corelative
terms.
That the extinction of paper money and credit discounts would reduce
the currency only the sum of the excess beyond the specie measure, which exists
but temporarily, producing evil while it lasts, and that merchandise would be immediately
exported to bring back the coin for which bank notes and credits are now substituted
in the currency.
That debt in any form is not money, and will not supply the place of
it, except when money is seeking customers, and not customers money.
These are the leading points that I have endeavored to impress upon the mind of
the reader.
It seems necessary frequently to repeat, what ought to occur to every intelligent
man, that the objections so constantly urged against gold or a hard currency of
its being troublesome and unwieldy, could, and in practice would, be removed through
the issue by respectable parties or institutions—doubtless banks of deposit—of certificates
of deposit for coin, the coin being retained to meet the return of the certificate.
The advocates of a specie currency object only to the falsehood of inaugurating
into money what is in fact debt, that must be collected from the banks before it
can become money—they cannot pay till they can collect it from the community, and
the community cannot pay till they can ship goods to California or Europe and get
returns. All that we require is that no token shall be added to the currency as
money that is not money, to create false and enhanced prices for foreign products,
or to prevent the sale of our own, or to create false obligations, that in the nature
of things cannot be discharged. Against the certificate of deposit no objection
lies, as it would add nothing to the currency, nor depreciate in any degree the
value of money.
It is strange that men who can see the sun of a June day do not see the glaring
evils of our present system, and unite in measures to reform it altogether by the
establishment of deposit banks, earning their support and profit by borrowing money
at a low rate of interest, and lending at a higher, and charging an honest commission
for honest service, instead of interest on capital blindly loaned by the public,
against whom the interest is charged, or, as in Massachusetts and some other places,
an illegal and unjust rate of exchange.
Thus, in a commentary on Mr. Cary's article, finding it suggestive for the purpose,
I have endeavored to furnish a plain essay on our mixed currency system of coin
and paper money, that I deem an element of great unhappiness in the community, and
the most ingenious device for taxing the people without their knowledge or consent,
that could be conceived.
I may appropriately conclude with the well-known remark of Mr. Webster: "Of all
the contrivances for cheating mankind, none has been more effectual than that which
deludes them with paper money. This is the most effectual of inventions to fertilize
the rich man's field with the sweat of the poor man's brow."
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