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

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Chapter 22
Congress and the Currency

(Reprinted from Hunt's Merchants' Magazine and Commercial Review, LI (July, 1864), 30-35.)

In his report to Congress, December 9, 1861, Secretary Chase says:—"It is too clear to be reasonably disputed that Congress, under its constitutional powers to lay taxes, to regulate commerce, and to regulate the value of coin, possesses ample authority to control the credit circulation which enters so largely into the transactions of commerce and affects in so many ways the value of coin."

The nation is under obligations to Mr. Chase for his clear and unqualified assertion of the authority of Congress in this matter. There can be no doubt of the authority, but it has needed authoritative assertion; it is self-evident; without it there can be no adequate sovereignty in the government; no way of commanding or of protecting the resources of the nation. A currency of debt made by corporations, the creatures of State legislation, who make the more profit the more they issue, will infallibly cause the mixed currency to exceed the natural volume at which money maintains its normal value. It will strip the nation of coin by depreciating its value and making it cheaper than merchandise to the exporter, and thus control the general imports and exports of merchandise in spite of the government. It will determine whether money shall be imported or exported; whether commerce shall be active or depressed; whether men shall pay their debts or be plunged into insolvency; and defeat the very purposes of society and government by impairing the obligation of contracts, rendering property insecure, and individuals poor and wretched. It becomes, in spite of the indisputable constitutional powers of Congress, the disturber of commerce and of the value of money by destroying all regulation, obstructing the operation of the natural laws of trade, expelling capital in pure loss, and crippling the power of the government to provide for the common defence and general welfare.

But the constitutional powers here rightly claimed by Secretary Chase have no necessary connection with, or relation to, banking; they grant no authority to the national government to enter into the banking business, or to authorize individuals to enter into it; nor do they grant any authority to interfere with banking under State law. They have nothing to do with banking, but everything to do with currency-making; because currency-making interferes with the regulation of commerce, with the value of money, and with the chief ends of national government. Unquestionably they give to Congress full control of the currency throughout the United States. This is the point to which the attention of Congress should be earnestly directed.

When the obvious distinction between banking and currency-making shall be comprehended in Congress, there will be an end of the prattle about the interference of the national government with State rights in the matter of banking, for it is not banking that is interfered with in controlling the national currency. No matter how or when the business of creating currency was assumed by banks, it is not banking, but a function of national sovereignty with which the States have no rightful or constitutional concern whatever. There is, therefore, no necessary collision between the State and national governments in reference to it, and Congress has as plain a right to suppress it as to suppress the levying of duties on imports by the State authorities.

Banking is dealing in money and loanable capital. Currency-making is producing money, and credits to pass for money, whether inscribed in book account, and circulated by checks, or certified and circulated in bank or government notes. We are not now considering the right or expediency on the part of the government of circulating its debt as currency, which may well be doubted. Everything belonging to a running cash account is alike currency, embracing, of course, every item debited to the cash account of every trader, bank, banker, or government. Under an exclusively metallic or money currency it is obvious that every such item would be money, or covered dollar for dollar by money on deposit, and circulated in certificates of deposit or in checks.* But the term "deposit," applied to a mere bank credit payable on demand, without money in reserve against it, is, in plain Saxon, a lie. The French term "account current," applied to the bank credit, is more honest and more appropriate, although a fiction still so far as it exceeds the money in bank, and is subject to check at sight.

The State governments may very properly authorize corporate banking to any extent they please; but no constitutional power remains with them to authorize the creation of currency in any form whatever; and there is no more reason why bankers should issue fictitious credits, whether in handbooks under the name of "deposit," or in notes, than that an insurance office, or a trust company, or pawnbroker, or any individual trader should do the same thing. Whenever a bank discounts a bill or security that forms the fund out of which it is itself discounted, the transaction is not banking but currency-making; and it is a cheat, for there is no such value in existence as such currency pretends to be or to represent. It is simply a fictitious credit, and it makes not a particle of difference in principle or effect whether the credit thus created is circulated in checks, or notes, or in money itself. For instance, suppose A obtains a credit of this character from his bank for $10,000; he has then $10,000 of theoretical "money" more than he had before at the debit of his cash account, and the bank holds so much the more of theoretical "deposit." If he draws the whole sum in specie, the net liabilities of the bank contain the augmentation, its assets and liabilities being reduced alike—and, unless the specie is exported, the volume of national currency also contains the augmentation of $10,000; it will appear probably on deposit in other banks. If this check is answered in bank notes, the effect will be the same; the deposit will appear in other banks; or, if he merely passes his check to another bank, it goes to somebody's credit and there as an additional deposit. In any event but that of exporting the coin the national currency is augmented; and if the bank currency be convertible at par, the local value of money is degraded $10,000 by the fictitious deposit, whether it appear in the accounts of banks or in the hands of the people or the government. Or, if it be convertible at a discount, the net sum that can be obtained for it in gold is the measure of the degradation of the value of money.

This is the whole explanation of the general suspension of money payments in December, 1861. The government had issued $20,000,000 of "greenbacks," and obtained a fictitious credit at the banks for $150,000,000, less the bank discount. No precreated currency, and, consequently, no invested capital was borrowed or loaned for any portion of this in advance of its issue, as in the case of the five-twenty loan negotiated through Jay, Cook & Co., and other private bankers. It was purely a creation of currency, on which those who received it subsequently loaned their capital to the government, not to the banks. To the extent of the bank credit the government loaned the banks as much as the banks loaned the government, which was nothing at all; it was simply an exchange of promises to pay between the negotiating parties. The banks neither borrowed nor loaned any capital or value in this transaction; but the people subsequently loaned their capital to the government, by giving credit to the bank promises, while the banks held the security in government bonds. As to the greenbacks, of course the loan was made directly to the government by those who gave value in exchange for them. In round numbers, $170,000,000 went to the debit of the government Treasurer's cash account in these two transactions, and $150,000,000 was added to the bank "deposits." Is anyone so dull as to suppose there was a dime of money or of capital in the country afterwards more than before by reason of these currency operations? Yet there was $170,000,000 more currency than before, to increase prices, check the exports, and stimulate the imports of merchandise; in other words, to depreciate the value of money, make it cheaper than merchandise, and compel its shipment in the place of merchandise. Enough of it had got into general circulation, and taken effect upon general prices, to accomplish this untoward result in December, 1861.

That the banks paid specie for the drafts of Secretary Chase on this fictitious credit, made no difference to them or to him— added nothing to and deducted nothing from their debt currency, because it reduced their assets and liabilities alike, leaving their demand liabilities in excess of their specie reserves precisely the same as if they had answered his checks in bank notes, or in checks on other banks. Nor did it make the slightest difference in the volume of national currency, which, being inflated by the "greenbacks" and bank credit above the normal proportion of money to capital, could not maintain its convertibility and remain in the country. The foreign exchanges necessarily became adverse; the excess of currency was demanded in money for shipment, which the banks could not pay, and they broke, as everyone who thoroughly understood the transaction knew they would when they took the loan upon that false principle.

It is, therefore, futile for Congress to legislate against bank notes; they must repress the fictitious credit, which is the prime evil, or original sin; the bank note being, like the check, a mere emanation from the so-called "deposit," and an instrument of its circulation.

There is a self-delusion among bank officers in relation to this matter; they fancy that they discount on their deposits and circulation in all cases. This is never true when the deposits or circulation and the loan are increased by the same operation. It is true only when one person deposits currency and another borrows it; then the discount is made on deposits of currency after the manner of the Savings Banks; and whatever unconstitutional power may have been exercised, whatever mischief may have been done by creating currency before, this transaction does no additional harm, because it does not increase the volume or depreciate the value of the currency. It adds nothing to pre-existing prices; it is then banking, not currency-making; it is dealing in loanable capital, the capital having been loaned upon the precreated currency of banks or government, or invested in coin at the price formed by the mixed currency of debt and money, and transferred thereby to and from the bank. Then the bill is not the fund out of which it is itself discounted, and the business is like that of the Rothschild's, or Baring's, or Brown's, or Peabody, or other legitimate bankers, in which immense estates have been accumulated, without injury to the currency or capital of any nation, or of anybody. Corporate banking must be confined to this legitimate business to be honest in principle or useful to the community, and, thus conducted, it would be found in the long run, and on the average, more profitable to its proprietors than the present system of currency-making, which is continually crippled in its loans by its abnormal demand liabilities, and by insolvency of its own making.

Capital may be transferred from one owner to another through debt perfectly well, without money; but this does not make capital of the debt. Debt may be organized into currency by government or the banks, and serve as a common medium of exchange, but this does not make it money, nor supply the missing capital of which it occupies the place; because it lacks the power of payment —the element of value and wealth. You only change your debtor in accepting for an individual obligation the obligation of the government or a bank, and are as much unpaid as you were before. In either case you lend your capital on an obligation, which is a very different thing from being in possession of money that you own and no one owes. A debt currency possesses only the power to borrow capital, less the wealth in money it displaces, and individuals and the nation are so much the poorer for its presence; there is so much the less capital in the country for individual and for general use in production or trade, consumption or enjoyment—so much the less means for prosecuting war or the arts of peace.

One thousand bushels of wheat may be sold on credit at one dollar per bushel five times over, and produce five thousand dollars of promissory notes, all of which may be discounted in bank and converted into so-called "deposits," amounting in round numbers to five thousand dollars more. This will make ten thousand dollars of debt erected upon one thousand dollars of value, but in all this debt there is not a dime of capital; the capital being in the wheat and nowhere else. In the schedule of national wealth there would be found in all these figures but one thousand dollars of capital or value; the ten thousand dollars of debt would be nowhere. Bankers thus run in debt by making a discount, and then fancy that debt to be money or capital in a "deposit," on which they can discount again. It is to be regretted that our language furnishes only a cant word to express the nature of such transactions, namely, kiting—simply an exchange of memorandums of immature contracts—paper statements of contracts unfulfilled.

But the spurious currency thus created, creates price as if it were money; it creates price without value. As it furnishes no value to export in exchange for an equivalent value in the imports, the value necessarily exported in money to make room for it in the currency is sent abroad in pure loss; it is an exhaustion of so much precreated capital, leaving only paper memorandums of debt in its place. Whereas, if the increase of currency were in money, whether mined or imported, it would furnish a value to export in exchange for an equivalent value in the imports, and instead of being a loss it would be a gain of national wealth; precisely like an increase of wheat or corn or beef or any other commodity the excess of which is exported in exchange for other capital that is in less supply and greater demand, and, therefore, of higher value.

It is the difference of international value alone which determines whether money shall be exported or imported. California exports money because it is cheap from an excess of supply, precisely as Illinois exports wheat; it continually exceeds the natural volume of currency required by her circulating capital; and California grows rich by producing and exporting money, as Illinois grows rich by producing and exporting wheat, and exchanging it for other capital more needed, and consequently of higher local value. The so-called "balance of trade" must be always against California and Australia while they produce money in excess of the equivalent value required by their capital for its circulating medium, and their general prices must be always high enough to attract imports to dispose of their surplus money. By the same rule the "balance of trade" in wheat is against Illinois, and by the same rule the "balance of trade" in money is against any state or nation while the volume of its currency is convertible at par, or at a discount, in excess of the normal money measure, in spite of tariffs, or prohibitory laws of every description. A tariff, such as Congress has just enacted, raising the rate of duties fifty per cent, will check the exports and imports of merchandise alike; it will simply cripple commerce, leaving the export demand for gold precisely as before, depending upon the volume of currency convertible in relation to our circulating capital. It is the simplest rule in the world that sellers must be buyers to the same extent. If the imports exceed the exports in value, the balance is obviously profit. If, on the other hand, the exports exceed the imports, the balance is loss, gold and silver being included either way. Just so far as we cease to be buyers we must cease to be producers and sellers, for men will not produce what they can neither sell nor use; and just so far we limit our capital and cheapen money.

It follows from these considerations that the difference to the wealth of the nation between producing a currency of money and a currency of debt is double the convertible amount of the debt currency, like the difference to a merchant between making or losing one thousand dollars, which is two thousand dollars in his stock account. Adam Smith's theory of the economy of the precious metals by the use of a currency of debt in their stead, which is adopted by nearly every European economist, including John Stuart Mill, is the most remarkable and the most mischievous heresy that ever found an advocate in any science.

The fallacy consists in the supposition that the normal value of the gold and silver displaced by the debt currency, or "paper money," is returned in the imports; whereas, they are exported only by reason of the abnormal predepreciation of their value in the paper increase and adulteration of the currency. The value returned, therefore, is not the natural value like that of money, from its natural increase, but the degraded value produced or caused by the spurious currency—the returns being in price and not in value. The practical effect is to raise the price of imports but not of exports. We cannot, with our spurious currency, make a price for other nations to pay, except for commodities of which we have virtually the monopoly of production; and, with regard to them, every unnatural rise of price is a damage to ourselves, because it limits consumption and accordingly production.

Wealth consists of value, not of price—of utilities and quantities at low prices, not of scarcity at high prices. The lower the prices by the increase of supplies the greater is the national wealth. Temporarily an increase of currency raises the price of exportable products and causes the export of gold in their place; but when their supply permanently exceeds the quantity required for home consumption their price must fall to meet the demand and price of foreign markets; and then the price of imports rises still higher to absorb the fictitious currency and price that is no longer employed by the exportable commodities held above the shipping price. As our exports fall in price, unless by reason of an increase of quantity, the imports must rise to fill up the measure of the currency.

Every merchant is familiar with the manner in which the holders of flour, grain and provisions frequently keep their commodities above the shipping price by obtaining funds through discounts at bank. These discounts cost the owners of the commodities interest for the benefit of bank stockholders, while they create the currency, with its false price that stops the sale of the commodities, turning the foreign exchanges against the country, and the export demand upon gold in pure loss.

At this moment—May, 1864—our cheap currency is stimulating imports in immense quantities at enormous real prices in gold value, while we hold a large excess of grain, provisions and other exportable commodities unsold, and are shipping gold at the rate of one to four millions of dollars per week. It is all being paid away in the prices created by the fictitious currency for the benefit of foreign producers. It will be observed that this money goes directly into the hands of the producers of our imports to raise their prices against ourselves, while the effect it has upon our exports beyond our own borders is inappreciable. The nation might as well plunge so much money and capital into the middle of the Atlantic Ocean.

* "The term money, with respect to the civilized commercial world, means gold and silver; with respect to any particular nation, it means that nation's current coin."—Robert Torrens, Essay on the Production of Wealth (London, 1821), p. 305.

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