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Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
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Chapter 21
The Monetary Unit and Financial Economy


(Reprinted from Hunt's Merchants' Magazine and Commercial Review, XLIX (Dec, 1863), 416-25.)

Notwithstanding the numerous pages I have contributed to your magazine on the subject of political economy, I have never given you my ideal of the true system of national finance. Dealing with things as they are, and opposing the factitious principles and arrangements of a false economy, I have scarcely thought it worth while to present views that may be deemed abstractions, however desirable may be their attainment. But it is clear to my mind that an entire change in our system of currency is inaugurated by the necessity on the part of the Government of providing a circulating medium in obtaining a loan of capital from the people. Common sense at once discovers the sophistry of the old system by contrast with the new. The people see that the capital they are now lending without interest on Government notes, they have all along been lending on bank notes, not only without interest, but that they have been needlessly and very absurdly paying interest on their own capital thus loaned to bring the bank notes into being—a system which has compelled the sale of goods on credit and covered the traders of the country with embarrassment. In this way they have been under the necessity of lending capital when they have no capital to lend—when their normal and necessary condition is that of borrowers.

With this knowledge, and the manifest advantage of cash sales, consequent upon a pre-existing circulating medium in the place of so much bank debt, besides the saving of taxes needlessly imposed for the benefit of fundholders on so much public stock that would otherwise be created, the public will surely give to the bank debt currency system leave to withdraw. I consider it to be already virtually dead, requiring only an act of taxation to bury it beyond resurrection. Whatever good there is to follow will depend upon the aggregate truth and faithfulness to honest principle and real science in the ideas of the people. I wish, therefore, to present mine, however impracticable they may seem, as a contribution to the fund of general intelligence on which our future currency and financial economy must be founded.

It is not the proper business of traders in merchandise to lend capital. It is the business of banks and bankers to deal in loanable capital, and of traders generally to buy and sell goods, and borrow capital of banks and bankers when necessary or desirable. In this natural and proper way of doing business, the loans of the banks would be vastly increased, in being limited only by the amount of capital they could borrow. When we reflect on the great amount of merchandise sold on credit in this country, all of which is somebody's capital loaned and borrowed, we may form some conception of the vast business that would flow through the banks if they would give it freedom from the crippling operation of their debt currency in demand liabilities for debt against debt—for fiction against fiction.

My ideal of the true system of finance is that everything unreal, factitious, and difficult of comprehension, in respect to it, should be discarded. I would, therefore, discard the unstable dollar to begin with, and adopt the troy ounce of gold as the unit of price and value; for the dollar is almost a myth, it means everything and nothing, in common apprehension, and is really a mysterious thing to some intelligent minds. It is silver, of various weights and various degrees of purity; it is of gold, or it is of paper, according to the notions that happen to prevail in any country where it is adopted as a medium or instrument of exchange. Nobody knows where it came from, nor when it first appeared on the face of the earth. Its authentic written history dates back to the beginning of the sixteenth century, when it became known in Bohemia as an ounce of silver of a certain purity and accuracy of coinage, which made it a reliable equivalent and instrument of exchange. Now it has shrunk in that country to 14 dwts. and 6½ grs., alloyed one-fourth; it is the "thaler," worth about 70 cents by our gold measure. In Italy, it is the "talavo," weighing 18 dwts. and 22 grs., alloyed 40 per cent, worth about 71 ½ cents. In Spain, it weighs 17 dwts. and 8 grs., and would be worth here as bullion $1.06, payable in gold, and as a foreign coin it would fetch $1.09 or $1.10 for export to China. Our old silver dollar, coined prior to 1834, weighed 17 dwts. and 10 grs., and would now exchange as bullion for $l.O6½ of gold. Recently, our dollar was of gold, alloyed one-tenth, weighing 25.8 grs., worth 100 cents; to-day it is of paper, and the gold dollar is worth 156 or 157 cents. The legal paper dollar cannot be said to be worth anything—the worth it relates to being in our property, which the Government may take by taxation to pay it when necessary; it is not in the paper and in the property also, but we can borrow on the paper dollar 64 cents in gold. The passing of a paper dollar is merely borrowing capital on the credit of the promisor; it pays nothing. Thus we see the dollar is just about as uncertain a thing as can be contrived for an instrument of exchange; and the man who says it is always worth a hundred cents does not know what he is talking about. It is a staggering thing, thoroughly demoralized, that cheats one-half of the community, and more than nine-tenths of the traders, out of their just earnings. I would abolish it altogether.

I would have an established weight, a known reality, something plain to the commonest apprehension, as the unit of price and equivalent of other values. I would adopt the troy ounce of gold of the present standard purity, and coin the same in both a decimal and an octave division of numbers. There could be no mistake about this, and the government could make nothing else of it but an ounce of gold. It would put at rest the fallacy that government fixes the value of money by establishing the weight and purity of coin. Very few people comprehend that the act of the government in coining is simply an act of inspection, like determining the quality and weight of a barrel of flour, and that the value depends, not upon the stamp, but upon the supply and demand in the one case as in the other. More gold cheapens gold, as more flour cheapens flour, and it could scarce fail to be seen, if bankers put upon the markets promises to deliver ounces of gold when they have none to deliver, that the promises being accepted as gold must produce a factitious increase of currency and local depreciation of gold in the market, and infallibly a loss to the community, dealing in such promises, of their whole amount. We cannot teach this truth to unpracticed thinkers upon the subject, because of the mysterious character of the dollar. It is an unequal fraction of the troy ounce, liable to alteration in character and quantity by the government—everything by turns and nothing long—until people have come to consider it an artificial and temporary contrivance that anybody can make out of any sort of metal, or out of paper, as good as the best, with Governmental sanction.

An operation of this kind in wheat has recently been developed in Chicago, which illustrates, perfectly, the principle and effect of our fictitious currency. The warehousemen, seeing that their warehouses are replenished as fast as they are emptied, put upon the market warehouse certificates of wheat for delivery on demand, on their own account, when there was no such wheat; but they thought they could—and they generally could—meet the certificates without danger of defalcation. The consequence was that there was constantly more wheat offered for sale in Chicago than had any existence.

A rudimental lesson in political economy was here plainly and practically taught. The owners of the wheat found its market price depressed to correspond with the apparent increase of quantity, and that they were competing against their own capital in the hands of the warehousemen for the sale of their own wheat. By the law of value, in supply and demand, they were losing, in the degradation of the value of wheat, as much as the fictitious certificates amounted to, and having acuteness enough to discover this in their special traffic, they procured the passage and enforcement of a law which put a stop to the damaging and abnormal business. Why had they not—why has not every man of common sense—acuteness enough to discover the same damaging principle in our fictitious currency? The owners of money, or of capital invested in the currency, are competitors against their own capital, precisely in the same way, and with the same result. Their warehousemen are the banks who issue on their own account certificates and credits for dollars of money, when there is no such money belonging either to themselves or others. The whole currency is depreciated by the imaginary dollars thus circulating in the market; but the depreciation is in value, not in price, because the dollar is the unit and measure of price. The dollars of money lose so much of their exchange value, or purchasing power, precisely like the bushels of wheat, by the offering in market of money that has no existence.

This simple truth is obscured by the mysterious character of the dollar; but as every person comprehends that an ounce of gold, like an ounce of anything else, may rise or fall in value, the adoption of the ounce as the unit of price would put an end to the sophistication by which the country is plundered of its capital in dealing with other countries, in paying a fictitious price of our own creation for imported commodities, while our exportable commodities must be sold to meet the foreign demand, in accordance with the measure of price of foreign markets, or remain at home. And it would abolish the iniquity by which individuals are plunged into bankruptcy and ruin, in making obligations to the banks and to each other to deliver dollars, or their equivalent in capital, never created, and which, consequently, can have no existence.

With the ounce for our unit in place of the dollar, the nomenclature of the inferior coins should be preseved of dime, cent, and mill. The following is a schedule of the proposed coins, with their equivalent values under our present gold dollar system:

1 ounce  of gold — 10 dimes, or 100 cents, or 1,000  mills — equal to $18.6000
1/2 " " 5 " 50 " 500 " " 9.3000
1/4 " " 2 1/2 " 25 " 250 " " 4.6500
1/8 " " 1 1/4 " 12 1/2 " 125 " " 2.3250
1 dime " 10 " 100 " " 1.8600
1/2 " " 5 " 50 " " 0.9300
1/4 " " 2 1/2 " 25 " " 0.3650
1 cent of silver 10 " " 0.1860
1/2 " " 5 " " 0.0930
1/4 " " 2 1/2 " " 0.0465
1 mill of nickel " 0.0186
1/2 " " " 0.0093

The fractions of the dime, and, indeed, the dime itself, should be coined in the ring form, to avoid the diminutive size of the disk that would be unavoidable otherwise, in coins of such small weights. It would be better, for the sake of uniformity, to coin the fractions of the dime of gold than silver, which latter would be appropriated to the cent and its fractions, even if there should be some inconvenience in the diminutive size of the gold coins. Besides, gold is our staple product, rather than silver, and the greater the use we make of it the higher is its local value, and the more value we must obtain for it in international exchanges. The schedule, altogether, comprises precisely the same number of pieces as our existing coins. I think there would be no difficulty in expanding the diameter of the ring to avoid the inconvenience of diminutive size in any of the coins, and if the ounce, with its fractions, were coined solid, while the dime, with its fractions, were coined in a ring, the arrangement would be doubtless as convenient and as perfect as any that could be devised. Another, and perhaps weightier, argument in favor of the most extensive use of gold is that it is our standard, and the closer we adhere to it in the coinage the more accurate are our values.

No one accustomed to the use of a decimal currency doubts its superiority to a system of vulgar fractions and duodecimals, like that of Great Britain. But no system is perfect that does not admit of a ready division of the unit into eight parts, without remainder, to measure price by halves, quarters, and eighths, to correspond with the natural division of quantities. We do not buy the tenth of a bushel, or of a pound, or of a yard, of anything; we buy square quantities, and have square prices to pay for them; we need coins in square numbers to harmonize with this natural division of things. The currency of France is so inconvenient in this respect that French writers have proposed to abandon it for an octave system to measure price by eighths. But the diminutive nature of the French unit—the franc—is a still greater objection to it, because of the long array of figures required to express any considerable aggregate of prices. Our dollar is, in this respect, too small. The ounce, as here proposed, obviates this objection, while it provides a combination of decimal and octave numbers perfect for all purposes relating to the currency.

Troy weight is the most ancient of the weights used in Great Britain. It is the standard weight of the kingdom, and of course is referred to for the verification of all other weights. It has, from the earliest records of English commerce and science, been employed for the compounding of medicines, for the weighing of gold and silver and jewels, and for all experiments in chemistry and natural philosophy. It is, therefore, perfectly familiar to commerce and science, and while we employ it in weighing the precious metals the troy ounce seems to be the most natural as well as convenient weight for the unit of our money. It would be an effectual aid to the government, in recovering its constitutional control of the currency of the nation, thus to change the nomenclature and the weight of the coins. We could the more readily distinguish the currency furnished by the government from that created by the banks—accept the former, and discard the latter.

We should have, for a period, the trifling inconvenience of using the affix, new, for the new coins below the denomination of the ounce. We should say, the new dime, the new cent, and the new mill, until the old pieces were recoined or passed out of circulation; but this inconvenience would be no greater than we have already experienced in getting rid of the old silver dollars, and the old copper cents, which differ essentially in their value from the new ones. The process of changing the old currency to the new would be a very simple matter, which any schoolboy would at once comprehend. It would require merely to divide the sum of dollars and cents by the number of 18.6; the quotient would be ounces and decimals of the ounce.

In the next place, I would recover the capital, that is, the money, belonging to our currency; an amount equal to about one-tenth the sum of our circulating capital, or one twenty-fifth part of the whole property of the nation, which is now deficient, by gradually, if not rapidly, converting the paper into money; because it would be a gain of business, as well as of individual and national wealth, at every step. Our people must produce commodities to exchange for gold and silver to recover this capital, or they must produce the gold or silver itself. In either case, they acquire so much capital individually, and, at the same time, augment by so much the wealth of the nation; for the wealth of the nation is but the wealth of individuals.

If you owe me and I owe you $1,000, our assets and liabilities are so far alike, and so far neither of us is worth anything; a re-exchange of obligations annihilates the debt. This is the principle of our debt currency, whether created by the banks or the government; there is nothing in it, and when the kiting is no longer agreeable or possible to either or both parties, a set-off annihilates so much currency and so much price along with it. The element of the debt currency of the government is unassessed taxation; individuals owe the government, and government owes individuals an equal sum, the adjustment of which leaves just nothing at all. There is no wealth, therefore, in the government debt; the wealth is in the property of the people that is bound to pay it; we cannot double the wealth by adding the debt to the capital or property that is bound for it. Obviously, were all the debt of the government and the people instantly annihilated it would make no difference in the aggregate wealth of the nation. But if you or I owe $1,000 of gold, it is so much capital that the government may borrow on its Treasury notes, over and above anything it can have if the gold is not here, and a debt currency occupies its place; it is so much individual and national capital and wealth. I say, therefore, I would recover this capital to the currency and to the nation which is now repelled by the demand notes and credits of the banks, and by the notes of the government. I would have the money flow into the national treasury, or currency bureau, naturally, and either retire the notes, as convenient, by paying out coin instead of the notes, or I would retain coin and bullion in reserve, ounce for ounce, against the outstanding notes, and thus convert them into certificates of deposit. It is the most preposterous nonsense in the world to suppose that money and the promise to pay it can both be kept in circulation together and made available as capital, and that we can thus eat our cake and have it too. If we circulate the promise, without reserving the money against it, we must part with the money and lose so much capital, absolutely, by the depreciation of the value of money to correspond with the factitious increase of the currency. If we circulate the money, or the certificate of deposit with the money in reserve against it, we possess so much the more capital or working wealth for the prosecution of war or the arts of peace.

Nothing can be more certain than the fact that there is never a deficiency of currency in this country when we are exporting gold and silver, and the heavy exports of these metals now taking place from New York and direct from California, with the large and increasing premium on gold, demonstrate a depreciation of its value, from a plethora of debt currency, which can only be accounted for by extreme ignorance of the first principles of political economy on the part of those who manage the fiscal concerns of the nation.

To check, for the present, this ruinous course of debt, depreciation, and loss of capital, the government should authorize the chartered banks and individual bankers, who hold the purse strings of the nation, to borrow capital already invested in their bank notes and pre-existing "deposits" by the people, as well as the capital invested in the demand notes of the government. This fund would be paid into the banks by its lenders, in the preexisting circulating medium, and loaned to the government by the banks without augmenting the currency or depreciating the value of money at all. The same funds, having been distributed by the disbursements of the government, would return to the banks in the deposits of the people in a very few days or weeks, on the average, when they would be loaned again; and they might thus be returned and reloaned fifty times without expanding the currency or doing any harm to the capital of the country.

There is an abundance of capital for this purpose in the hands of the people of the loyal States; it is increasing faster than it is being consumed; the consumption of the war only stimulates production so much the more in excess of the demand. Two wars like the present would not diminish the aggregate capital of the Northern and Western States a fraction, since our power of production exceeds any demand that can be brought upon it. Never since the nation was born has its general business been so active and profitable and its aggregate wealth increasing so fast as now.

But the government is embarrassing itself and the nation by creating currency in the fictitious credits of banks, instead of borrowing capital loaned on the precreated currency of these institutions and on its own precreated notes. When loanable capital was going a-begging at 4 per cent per annum in 1861, and the Secretary of the Treasury was authorized to pay 7 3/10 per cent, with the currency reduced below the specie measure, the exchanges of the world consequently in our favor, and specie flowing into the country from all directions, he should have borrowed capital through their agency, and paid them a fair profit for it; instead of which he and they kited into existence a fictitious credit of $150,000,000, increasing their demand liabilities from $427,000,000 to about $577,000,000 against $87,000,000 of coin which they held, and thus created $150,000,000, or thereabouts, of fictitious currency. Of course this depreciated our money, turned the foreign exchanges against the country, brought upon the banks a demand for specie which they could not meet, because they and all the other debtors of the country were being called upon to pay a spurious price of $150,000,000, for which no equivalent value was ever created. When it comes to paying debt, instead of kiting it, a value must be produced and tendered—the product of capital and labor; the spurious price created by a debt currency declines with the decline of the volume of currency that makes it, and cannot be paid. An operation of this nature was taking effect in the fall of 1861. Money was being demanded to be taken out of the country for the $150,000,000 of spurious currency, because enough of it had been put in circulation to exceed the natural money measure of the currency, to which extent it could not be paid; and the only alternative was a general suspension of money payments.

When gold and silver are mixed, and circulated as currency, there is a depreciation of their value, but there is a perfect compensation in the increase of capital. It is the same with wheat; an increase of quantity reduces its value, but it is an increase of capital and wealth, notwithstanding. The miner who produces gold, although the production reduces the value of gold, improves his fortune and increases the capital of the nation precisely as much as the miner who produces copper, or lead, or iron to an equivalent value; any surplus will be exported in exchange for other capital in either case. But he who produces a debt currency depreciates the value of gold and silver and expels so much capital in dead loss to the nation. There is no compensation, because there is no equivalent augmentation of capital to exchange for other capital. The wealth of the nation consists of value, not of price. It is well said by John Stuart Mill, "If values remain the same, what becomes of price is immaterial, since the remuneration of producers does not depend upon how much money, but upon how much of consumable articles they obtain for their goods."

But to return to my ideal of the true system of financial economy. To recover the capital belonging to our currency, I would tax the debt currency of the banks out of existence, and restrain the paper issues of the government, constantly, within the sum necessary to keep the foreign exchanges in favor of the United States, until the reserves should equal the circulating notes—a matter perfectly easy of accomplishment whenever the government chooses to control the currency. The criterion of the natural money measure of our national currency is the nominal premium on sterling exchange of 9½ per cent, because London is the great clearinghouse or center of the exchanges of the commercial world. It is the purest folly in the world to permit this nominal premium to be exceeded while there is a dollar of paper or of bank balance of currency in existence, and the specie exported in consequence, as it is being exported now, is so much national capital thrown away.

I would have the government issue no new notes payable to bearer, and none whatever of a less denomination than two ounces—equal to $37.20 of our present currency—for general circulation, that the people may become accustomed to the use of money, and familiar with the truth that all the gold and silver we get is capital, which comes by the employment of labor, to the increase of business and of public and private wealth; while paper currency can be made by the ream or the bushel, without augmenting the business or the wealth of the nation a single fraction. It is only creating a false price and destroying so much paper in the production of moonshine. But I would have the government institute a system of post-office orders, by which, in exchange for coin, all persons could be accommodated with small orders for any fractional part of an ounce or of two ounces, payable to order, drawn by one postmaster on another in any part of the United States, charging some small fee to cover the cost of transporting gold to maintain this system of money orders. This would be necessary to accommodate the poorer classes with a safe and convenient method of remittance, and all classes with the means of paying small bills at a distance, such as newspaper subscriptions and the like. But all the larger operations in exchange should be left to bankers—the government drawing only to collect its balances and suit its own convenience. Let the government provide the currency, and bank and bankers attend to legitimate banking and the general business of dealing in exchange.

The circulating notes, without exception, should be drawn to order, that they may be endorsed from hand to hand when required, and, like the notes of the Bank of England, they should never be reissued. These provisions are for security against counterfeiting. Two ounces would be a sufficient magnitude of value to induce careful inspection, and place the notes in the hands of traders and bankers who have more or less skill as well as experience in the examination of currency notes; and their constant renewal at the office of issue would place them under the frequent observation of the issuers and of the experts of the office. Between the retailer and the consumer, as it is now in England, there should be no circulating medium but coin.

The rapid progress in the arts, it is apparent to everybody, is not confined to honest purposes, and the art of counterfeiting circulating notes is quite as forward as any other. I have seen bank notes, spurious beyond question, and struck from a counterfeit plate, that, although accustomed to careful scrutiny of bank notes, I could not distinguish from the genuine, nor could anyone but the engraver of the genuine plate, without whose aid the bank would never have known which note to repudiate and which to pay. An almost boundless field of operation for counterfeiters is now opened in the immense issue of Treasury demand notes; and the recent act provides an issue of small denominations to circulate among the poor and ignorant, and generally between retailer and consumer, where no paper currency should ever be employed. There is no point of redemption—no place where the notes are necessarily subject to the scrutiny of an expert, and the signatures are engraved, not written. Under these circumstances, can anyone doubt that counterfeits will be abundant, and pass in the interior, if not in the large cities, as well as the genuine? It appears to me there is great danger that the Government, by and by, will not know its own issue; that our currency will be disorganized, and the whole financial system of the country demoralized and broken down by the unfortunate policy of relying upon and expanding paper currency issues for the conduct of the war.

If it be objected that coin can also be counterfeited, I reply that it is difficult to put together the conditions that will prevent the detection of a piece of counterfeit money. There are, I think, only two metals that will resist acids and combine to produce the specific gravity of gold, i.e., platina and silver, the former being heavier and the latter lighter than gold. But platina is very difficult to work in coining. 'It is so impossible that no considerable portion of it can be melted by the strongest heats of our furnaces," and it is the most costly metal, next to gold, that could be mingled in coin, being five or six times as valuable as silver and nearly half as valuable as gold. The amalgam of platina and silver cannot, I think, be colored to resemble gold; it could be used for loading the coin, that is, the amalgam could be plated with gold; but the ring, in any event, would be very different from that of a piece of gold coin, and as the production would be troublesome and costly, I think the danger of counterfeiting with that admixture is not very imminent, although the most so, undoubtedly, of any, because of its quality of resisting acids and the possibly exact similitude in specific gravity. As to any other admixture, the general use of a specie currency would soon furnish every trade with experience and skill enough to detect the spurious coin. There is a well-known instrument—a small balance—so contrived as to furnish the three measures necessary to determine the specific gravity of every piece of coin with much accuracy, namely, the weight, the circumference, and the thickness; so that with the application of acids also, there are more means of detecting false coin than false notes, and such as any proper degree of scrutiny would render effectual.

The charge of the currency, including the mint, should be given to a board of currency, with a bureau entirely separate from the Treasury, with offices of issue and redemption in most or all of the chief cities, and these should be loan offices also, where public loans may be negotiated and the money collected, and where the principal and interest would be paid. The currency notes should be paid only at the office where issued, and where the necessary proportion of coin would be kept in reserve; otherwise their circulation, I think, could not easily be maintained, if at all, especially at the West; because New York being the creditor city, the notes would command a premium at the West, and rush to the New York office continually for redemption. The gold, it seems to me, would be in one part of the country and the notes in another, or the government would be put to unnecessary trouble and cost in transporting gold to provide for this tendency or condition of the exchanges. But the chief advantage of the separation from the Treasury would be the division of labor and of risk. The business of attending to the details of the currency, in addition to managing the great fiscal concerns of the nation, is too much for one man; and if the Secretary of the Treasury should happen to be a rebel, or a thief (an occurrence that has befallen us already), immense disaster would be likely to result from his command of the treasure and entire financial resources of the government. I would have him deal with the bureau of currency as with a national bank, and restricted to the command of his own balances provided according to law. To have the bullion reserves all massed in one deposit at a central office would be too great a temptation to disorder, especially since rebellion has weakened the bonds of loyalty in the nation, and given us one unprincipled Secretary of the Treasury as an example which other bad men might follow.

In conclusion, I have to say that, although objecting to its financial policy, I am not an opponent of the existing administration. On the contrary, I desire to do everything in my power to promote the success of the Government, especially in the prosecution of the present righteous war—the result of a rebellion as causeless as it is wicked. Nor do I entertain any doubt of the purity of intention or patriotism of the present Secretary of the National Treasury. I only wish that his political economy may be as sound and intelligent as his politics. I believe that the plan herein proposed would tend effectually to check the unnatural and unnecessary increase of the public debt, which, in a false price, created by a false measure, is rolling up frightfully in obligations to be paid in real value; an unequal and improper charge upon the industry of the country, for the benefit of capitalists and the makers of spurious currency. And, finally, I believe that this plan, faithfully executed, would restore to the nation, through its constituted authorities, the normal power and command, which it does not now possess, of its industry and capital in war or peace for all future time.



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