1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar

The Ludwig von Mises Institute

Tu Ne Cede Malis

Advancing the scholarship of liberty in the tradition of the Austrian School for 30 years

Search Mises.org
Organization of Debt into Currency and Other Papers
by Charles Holt Carroll

Previous Chapter *  Next Chapter
Table of Contents

Chapter 20
Financial Economy

(Reprinted from Hunt's Merchants' Magazine and Commercial Review, XLVI (May, 1862), 424-28.)

Among teachers of political economy there is too much of books and too little of practical observation. Truth, in the abstract, passes too easily and too generally for truth in the concrete, and an abnormal principle is supposed to be immediate in its operation and results, which, like intemperance, requires time to develop its power of demoralization. This is conspicuously true of the doctrine that convertible bank notes and liabilities, payable on demand, cannot be issued in excess, because of the reflux upon the banks for specie. In its ultimate effect this is perfectly certain; but the effect may be postponed for months and years, according to circumstances. A vast expansion of currency, with its depreciation of money, in the issue of notes by banks or government, is perfectly practicable among a credulous people, or where, from the popularity of the issuer, or, in the case of the government, from patriotic motives, the public are disposed to grant an easy confidence, and encourage the issue, before this inevitable reflux will demonstrate the fact of the overissue and consequent depreciation of the value of money. Nevertheless, the depreciation is immediate in the rise of price of something, however unobserved, by the issue of the first dollar, and it costs the nation a dollar of capital in the end infallibly. It is the operation of a fixed principle, and not a matter of caprice or of choice on the part of buyer or seller.

Adam Smith was the first to discover and announce the truth, that the currency cannot be permanently increased by the operations of banking; but he did not discover the more important truth, that the temporary increase is a loss of capital to the community which permits it. On the contrary, he supposed the paper substitute to be a gain, by saving the use and cost of gold and silver in the currency. There was never a greater mistake in any science, and never one so fatal to the stability of property and the well-being of society. It is simply an exchange of solid capital for nothing, or for a piece of paper worth nothing—the worth being only in the property appropriated to its payment—because there cannot be two values in the same item of capital; one in the commodity, and another in the obligation to deliver it; one in money, and another in the promise to pay it. The paper promise, being merely a memorandum of an unfulfilled contract, and not the thing promised, must be an addition to the currency when issued, and therefore a false measure, unless the money promised is reserved against it, when it is a certificate of deposit, useful and desirable for any sum that would be inconveniently handled in gold or silver.

Adam Smith says:

The whole paper money of every kind which can easily circulate in any country, never can exceed the value of the gold and silver, of which it supplies the place, or which (the commerce being supposed the same) would circulate there if there was no paper money .....

Should the circulating paper at any time exceed that sum, as the excess could neither be sent abroad nor be employed in the circulation of the country, it must immediately return upon the banks to be exchanged for gold and silver.

This statement is utterly delusive, and wrong in its practical application to daily business, although true as to the ultimate result. It is surprising that Doctor Smith should have made it, when he had the example of John Law's banking in France to refer to—sixty years in history, before he wrote his "Wealth of Nations." It is a thorough refutation of Doctor Smith's theory, that Law issued bank notes, almost without limit, for nearly four years before the reflux of notes put the bank to any serious inconvenience. They were convertible all this time, of course, and specie, in dead loss, was running out of the country in payment for imported goods, at the fictitious prices created by the fictitious currency, moderately for a time, as its value gradually declined, but violently at last, with the accelerated loss of value, until the bank broke. It was afterwards ascertained that its notes in circulation amounted to 2,700,000,000 livres, about $540,000,000.

Doctor Smith qualifies his rule with the word easily; otherwise he makes it absolute. But the truth is, Law's bank notes did circulate easily and eagerly, greatly in excess of the gold and silver, of which they supplied the place. The rise of prices they occasioned threw all France, excepting the Chancellor D'Auguesseau and the refractory Parliament, into an ecstasy of delight. A Plutus had come among them, and enraptured the nation with his skill in creating debt, and converting it into money. Prices rose fourfold in the four years, from May, 1716, to the commencement of the year 1720. The distinction between price and value being unknown, this wonderful rise of prices was supposed to be an increase of value and of wealth. The bank notes commanded gold on presentation at the bank. Were they not as good as gold? Who doubted it? Few suspected that this rise of prices was merely a depreciation of the value of money, and that the currency of the kingdom had fallen in value the exact equivalent of the rise of prices; but such was the fact; the livre had lost so much of its purchasing power, and other nations were taking the gold and silver of France for nothing. Precisely as many livres as were added to the currency in paper were added to the price of things, over and above the true money value; and neighboring nations poured their commodities into the kingdom, to be exchanged for the precious metals upon these terms, profitable to themselves, but ruinous to France.

Such is the law of the case; consumers make their own prices with their local currency, and pay them, however much they may exceed the natural money value; but they cannot put their fictitious prices upon their own productions, and realize them from other nations. They can keep their own goods, and buy and sell at home at false prices, and flatter themselves with the possession of wealth at the false measure; but they cannot sell them abroad, unless at prices measured by the foreign currency, and the means of foreign consumers. If one should make a fictitious measure of price for his own family dealings higher than that of his neighbors', paying ten or fifty per cent more than they for all his purchases, and holding his surplus domestic products ten or fifty per cent above the market price, until compelled to sell from the necessity of the case, either to save perishable stock or to procure indispensable supplies, he would be justly considered a poor economist and a foolish trader. Yet, with superior soil for cultivation, specially adapted to the production of certain valuable commodities in universal demand, superior skill and hard work in his family, tasking the utmost strength of the willing members in peaceful industry, while other families are wasting time and labor in frivolity and wrangling, his family might save more than they spend, and accumulate considerable property in spite of his preposterous politico-domestic economy. This we believe to be a plain and proper illustration of the economy and condition of the United States in the management of business and the currency. Other nations get the advantage of us accordingly in the accumulation of capital.

We have repeatedly augmented the currency by simply running in debt, and have inflated the prices of grain and provisions and other exportable commodities above the shipping point, with a large surplus on hand beyond our domestic wants, even crippling our domestic consumption by the unnatural and extravagant prices. Farmers and dealers are encouraged and accommodated by the banks to hold overlarge stocks from year to year, for higher prices, checking reproduction, accumulating sour flour, with perishable commodities, in general perishing in the hands of holders; a great portion of the trading community meanwhile becoming irretrievably embarrassed, until, at length, shipments of specie force a curtailment of bank currency, throwing the hoarded stocks of merchandise upon a ruined market, and nearly all debtors into insolvency.

Among the later writers upon this subject, Professor Bowen, of Harvard University, adopts Adam Smith's theory, without even Adam Smith's qualification, and says: "Those who fear an excessive issue of convertible bank bills might as well apprehend that Lake Erie would overflow its banks and flood the surrounding country, because it is constantly receiving the surplus waters of the three upper lakes and of innumerable tributary streams." If the professor had taken his metaphor from the Mississippi River, he would have come nearer the truth. The periodical swelling of that mighty stream, with the devastating crevasse, illustrates the inflation of our currency, with the inevitable revulsion. But the professor limits his argument, with respect to inflation, to bank bills. They are but a portion of the bank debt which mingles with gold and silver in the currency, and the least important portion. The bills are but emanations from the inscribed credits called "deposits." The so-called deposits and balances due to banks are the more powerful and mischievous portions of the currency, because employed in all the heaviest operations of business. It is in them, or through them, that the fictitious currency is created, and through them the inflation and contraction take place. It is not, however, of the least importance what portion of the debt of the bank may be represented in notes or in book credits. The Bank of England originally issued notes for all her discounts. It is all the same, in effect, whether I hold a bank note in my pocket or the same sum in a bank credit; and the transfer in note or check is equally a transfer of my claim upon the bank, and equally an operation with currency. It is the balance at debit of the trader's cash account that comprises the currency he uses. The power of money upon prices, and, necessarily, the power of the currency upon the value of money, is exercised by this balance. It is this with which he buys and measures the price he can pay. In his mind, it is money, without distinction of its several parts, and it occupies precisely the channel of circulation that otherwise would be filled with money.

Why it is that the lessons of experience, the practical operations of business, are so little studied in reference to the currency, it is difficult to conceive. But so it is; the inflation of the currency, high prices and the high rate of interest that necessarily attends the increase of debt which forms the staple of the debt currency are uniformly hailed as evidences of national thrift and prosperity, until the moment of the explosion of the bubble; and that which is really a loss to the community is supposed to be a gain. We are never benefited by high prices from any cause originating among ourselves. Short crops or short supplies of our commodities among wealthy nations who are our customers, or inflated prices proceeding from an expanded currency among them, may be to our advantage, because we may then sell freely of our home products at high prices and large profits; but short crops or short supplies, and an expanded currency to produce high prices among ourselves, are precisely what we do not want; they lead in the direction of poverty and insolvency, not of wealth and prosperity, with infallible certainty.

Were it possible for us to possess but half as much money or currency as England, for example, in relation to circulating capital, obviously general prices here would be only one-half as great as in England. We would then manufacture cheaper than England, furnish cargoes at half the English cost, to all the world, realize double the profit, and sweep her commerce from the seas. Our imports would necessarily amount to double the sum of our exports. What then? Does anyone in his senses deplore the excess of his income over his expenditure? The balance of trade, that has occupied so extensively the thoughts of politicians, is a chimera. The balance of profit is in our favor only when our return cargoes exceed the outward in value; in other words, when our imports exceed our exports. And having supplied our home consumption and customers, all the value that we are induced to create in surplus products to supply a foreign customer, who returns an equivalent value, which would not be created but for his acquaintance and the opportunity of exchange, is manifestly a clear gain of national capital, to the full value of the amount returned, be it more or less.

Wealth is value, not price. It is a thing, and not a name. It consists of utilities, and not the name in money or currency that we exchange them by. Without a dime of money, all our gold and silver being wrought into ornaments or utensils, we should, it is true, be reduced to the inconvenience of direct barter, value for value, but we should be in possession of value the same as now— the same capital and the same wealth. Price would be abolished, the common measure of value would be unknown, but its absence would be merely a question of convenience, and nothing else. And as to a currency that is not money, it is unmingled evil.

With the present war on hand, and enormous government expenditure, it is of vast importance that the currency should be restricted to the lowest possible volume, because the more limited it is, the more we must produce and export advantageously of merchandise, the more we must import on money, the greater will be the supply of capital, the lower the rate of interest, the easier will government obtain the means to prosecute the war, and the less will be the amount and the oppression of the public debt. We should take no lesson from England upon this subject, except to avoid her preposterous policy of creating war loans, and the atrocious perpetual funding system which that policy inaugurated.

It is a ruinous policy for us to add to the pre-existing mixed currency the demand notes of the government. By this unwise policy the revolted States are defeating themselves. They are creating price and debt that they cannot pay. From this cause, and not from a deficiency of capital, it begins to be doubtful if they can much longer keep an army in the field. Let us not follow them in this wretched plan of financiering. Nevertheless, if we must have a debt currency, let it be the debt of the government, and not the debt of the banks. We can lend our capital on United States demand notes for government use, without taxation thereon; whereas, to lend it on bank notes or bank credits, kited into existence against government stock, is simply submitting to needless taxation on our own capital for the benefit of the banks. This is the absurd English system of taxing labor for the benefit of privileged classes, who lend only promises to pay. The people are the lenders of capital, and the interest is paid on government stock to the wrong men.

I propose to Congress, therefore, to tax the bank currency out of existence, and relieve the banks themselves from the operation of their present false system, which does not permit their loans to reach double the amount of their capital without forcing them to a suspension of payment; whereas, freed from the crippling effect of their debt currency, they would lend at least tenfold their capital, at a profit of one per cent per annum difference of interest, or ten per cent per annum in all, on their deposits, with ease and safety to themselves, and benefit to the government and the whole people. But this needs further explication, that must be postponed to a future opportunity.

Previous Chapter *  Next Chapter
Table of Contents