Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
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Chapter 23
National Finance with Legal Tender
(Reprinted from
Hunt's Merchants' Magazine and Commercial Review, LII (April, 1865),
271-80.)
PROFESSOR GOLDWIN SMITH,
LONDON, ENGLAND.
Sir:—I have read in the newspapers of New York a letter of yours on the Finances
of the United States, copied from the London Daily News, that I trust will
attract the attention of our people and Government, coming, as it does, from one
so conspicuous in science and so friendly to our nation as yourself. Without doubt
you are correct in your conviction that the financial administration is the weak
point in this country. It was the weak point prior to the rebellion, and has been
ever since the birth of the nation. Some of us have long been aware of this, and
have taken every convenient opportunity to impress the truth upon government and
people; but truth in political economy is of unaccountably slow growth everywhere;
and here, especially, it is thoroughly opposed and kept down by an unreasoning and
unconquerable prejudice in favor of what is absurdly called "paper money," as if
the promise to pay a thing could be the thing itself. You think the root of the
mischief here is the Legal Tender Act. Pardon me for differing with you on this
point. It seems to me the Legal Tender Act is neither root nor trunk, but a mere
offshoot of a false principle, having its root or source on your side
of the water, in the pet bank of your country, the Bank of England. I mean no disrespect
to you or your opinions in this statement, but I wish to place the responsibility
for the false system, under which not only the finances of this country but of the
commercial world are suffering, where I think it belongs. The establishment of that
Bank was the opening of an era of debt in the world that is needless, endless, and
boundless, and our nation is but fulfilling the financial destiny assigned to it
by that institution.
It was, as you are aware, the beginning of the public debt of Great Britain; a debt
that was paid, paradoxical as it may appear, in the capital of the nation when the
same was contracted. No other capital but that of Great Britain paid the cost of
the war in which it was consumed, and the delivery of the capital was its payment.
But the sophistical scheme of false banking re-established the debt for the benefit
of mere currency-makers, men who loaned no capital to the Government at all, but
added so much price to the value which the Government received
and agreed to pay for their currency obligations. It is a scheme that transmutes
from money into debt all the exchanges it touches, and piles upon commercial communities
a huge mass of needless individual indebtedness, over and above the sum of the false
currency it manufactures. Value pays for value, and service for service, but a debt
currency pays for nothing; it merely postpones the payment needlessly that with
a currency of money would be made at once.
No one is paid for his goods or his services in a bank note or check; one simply
gives credit to the promise of a bank instead of the promise of some other debtor,
and gets his pay by parting with the promise for value received. It is a false principle
that discards capital, which is the object of exchange in money, its element of
payment and of wealth, to substitute therefor mere debt as the medium of exchange,
which, in the dual nature of money, is precisely that element which of itself makes
no payment and is no wealth. A medium of exchange may be made of promises or of
paper or iron or copper tokens, but so far as it lacks intrinsic value it is not
the object of exchange, and so far it is poverty in the place of wealth.
The false principle is the formation of a "deposit" in pretended banking by discounting
a debt out of itself; creating so much additional debt and making it currency. The
credit given by a bank to its customer, which is not the transfer of a prior credit,
but which increases the loan and the "deposits" in one and the same transaction,
is no deposit, and no banking; there is no value received; it is currency-making
out of debt, and, to the extent of its convertibility into coin, it depreciates
the value of money, and expels an equal sum of capital from the community that originates
it in pure loss.
None but a wealthy or thriving community ever did, or ever can maintain
this costly and wasteful system of currency-making. Strangely enough, the industry,
wealth, and general prosperity which support the system are supposed to be its results;
but it has never been introduced in any of our new States or frontier settlements,
where capital was scarce, without crippling the energy and industry of the people,
and bringing about in the end almost universal bankruptcy. True, the credits it
has created have enabled individuals to purchase goods at inflated prices on credit
from the Atlantic cities, which they could not pay for, and this, by a sort of involuntary
robbery, has transferred some capital from the older cities to the interior States
and outlying settlements; but this has been but a wretched pittance of compensation
for the suspension of business, check of production, confusion and violation of
contracts, broken fortunes and broken hearts, that have followed its operations
with the certainty of death. It would be instructive to trace its history in the
experience of nearly all our Western States, but especially of Illinois and Arkansas.
Banking is a very proper, honest, and useful business; it is dealing in money and
exchange, and in loanable capital. There cannot be too much of it because it will
regulate itself. It is borrowing of those who have capital to lend, and lending
to those who have capital to borrow. But currency-making is another thing; it is
not a proper, necessary, or useful business; it is unnecessary, and as unprofitable
to any community as counterfeiting, because it creates price without value,
and the false price must be paid in precreated value for imports, while it checks
the exports of merchandise, forcing money abroad instead, until the excess of the
supplies of merchandise at length compels the holders to yield to the price and
demand of foreign markets. Beyond our own borders it does not raise the price of
our exportable commodities a dime, while its irresistible effect is to raise the
price of imports, stimulate increased supplies, and, as I have said, drive our money
abroad in dead loss, because of its degraded value.
Now, the immediate cause of the suspension of money payments, and of the present
ridiculous condition of our currency, with the expansion of debt under false prices,
was, and is, the operation of this false principle following the negotiation of
the so-called 7 3/10 loan with the corporate banks in the autumn of 1861.
The approach of the rebellion, evident in 1860, with the repudiation of Southern
debts, which broke the merchants of the North, and the open rupture in the attack
on Fort Sumter, in April, 1861, had so destroyed general confidence in credits and
in trade, and reduced the available assets of the banks and their liabilities, that
the currency of the loyal States fell below the natural money measure. This appreciated
the value of money and depreciated the relative value of merchandise, until money
became more valuable than merchandise. The foreign exchanges were turned thereby
largely in favor of this country, so that we gained probably $80,000,000 of gold
and silver in the year 1861. The banks were thus placed in a condition, not merely
of ease as to their liabilities, but of anxiety to lend their credit and maintain
their dividends. They had what they call money to lend, although those of the loyal
States, to whom alone my argument applies, owed, payable on demand in gold and silver,
the sum of $420,000,000, with probably $80,000,000 on hand to pay it with.
No official statement of the condition of the banks having been made at Washington,
since January, 1861, it is not easy to determine what portion of the large excess
of specie imported and mined here in that year went into their coffers, as applicable
to the payment of their liabilities; but the general distrust caused private hoarding
among those who were unfamiliar with banks, and, among the friends and customers
of those institutions, the transfer of large sums from general to special deposits,
which amount to the same thing, so it is not probable that the specie reserves available
for their demand liabilities of $420,000,000 exceeded $80,000,000, to which should
be added, say $80,000,000 of coin outside of the banks and free of hoards, making
the whole circulating medium to consist of a debt currency of $340,000,000, and
money $160,000,000 ($500,000,000), this sum of five hundred millions being less
than belonged to our capital in real money, as is evident from the state of the
exchanges, with the rapid influx of specie and the rapid efflux of merchandise in
exchange. I need not inform you that money goes where it has the most exchange value,
with no more reference to the so-called "balance of trade" than iron, or wheat,
or any other exchangeable commodity.
Because of this reduction of currency and excess of unemployed capital, the rent
of capital was low, and loanable capital and bank debt were begging customers at
3 to 4 per cent per annum. In this condition of financial affairs the government
came into the market for a loan of $150,000,000, offering 7 3/10 per cent interest per
annum. Can you doubt that the banks could have borrowed this sum for the government
at a much lower rate than this? But to have done so would have produced less profit
to them immediately; they were for grasping the whole 7 3/10 per cent at once, and the
want of scientific knowledge, with the indolence of those having charge of the negotiation
on the part of the government, threw the whole matter into the hands of the managers
of the chartered banks upon their own terms. Accordingly, without borrowing a dime
of capital, they undertook to lend the government one hundred and fifty millions
of dollars when they had not one hundred and fifty cents to do it with.
As I have said, they already owed a demand debt of $420,000,000, with only $80,000,000
of money on hand to pay it. They were the custodians of this money, not its owners.
It belonged to their prior creditors, whose forbearance was due to the favorable
condition of the foreign exchanges, and consequent absence of any export demand
for money. Creditors for nearly five times its amount were authorized to check upon
it at sight when the banks authorized the government Treasurer to check upon it
nearly twice over again, besides; and they maintained that they were not increasing
the currency because they paid the Treasurer's checks in gold. You will see the
fallacy of this statement in the fact that their demand liabilities, which constitute
the bank currency, were raised from $420,000,000 to $570,000,000, against the same
sum of money in reserve as before.
The government bonds thus granted to the banks formed the fund out of which they
were themselves discounted; debt was increased by debt, not by capital transferred,
and the "deposits" thus created, say in round numbers $150,000,000, to the credit
of the government Treasurer, was so much currency over and above all the pre-existing
currency, money, capital, and wealth of the country; in a word, it was so much fiction.
It matters not in what form or by what instrument a bank deposit circulates, whether
in note or check or money itself, it forms part of the fund offered like money in
exchange against the whole circulating capital of the country, which determines
the relative value of money and of other capital.
Doubtless some portion of the loan was retaken by capitalists who checked upon their
own pre-existing deposits without increasing the currency, but more of it was taken
by persons who obtained bank discounts for the purpose; besides, the government
had issued directly from the Treasury $20,000,000 of its own notes—greenbacks—so
I am quite sure that the sum of $150,000,000 was added to the currency of the country
without capital by the financial operations of the banks and the government in the
summer and autumn of 1861. No one can be so dull as to suppose there was any more
capital in the country because of this currency-making.
The money demanded as the equivalent for circulating the capital of the country
is never a fixed amount; it must vary with the aggregate of capital offered in exchange
against it; an approximate estimate is all that we can obtain from the best statistics;
but when sterling exchange remains for any considerable period at $4.8666 to the
pound, i.e., 9½ per cent premium on the Spanish dollar valuation of $4.4444, which
nominal premium is the true par, if we can then know the amount of the bank liabilities,
we can determine the natural volume of the currency with considerable accuracy.
I suppose the natural volume of the currency of the loyal States to have been something
more than $500,000,000 in the fall of 1861, but if we assume $500,000,000 to have
been the true amount, the $150,000,000 then added depreciated the value of money
here 23 per cent, equal to a premium on the gold dollar of 30 per cent. To have
maintained the equation of international values it would have been necessary for
us to export $150,000,000 of gold and silver. As soon, therefore, as that fictitious
credit to the government began to circulate and act upon prices, our exports of
merchandise were checked and our imports stimulated; of course a foreign demand
for specie took place, which it was obvious the banks could not meet, and they broke,
as every intelligent bullionist knew they would when they undertook the government
loan upon this false principle, for they were being called upon to pay $150,000,000
of value that nobody ever possessed.
Now this principle is the system of the Bank of England, and whenever that bank
aids or influences the creation of credits, used as money, in excess of the true
money measure, it either breaks to save the debtors of the kingdom, or the debtors
break to save it, and you have in England the "commercial crisis."
One may read Adam Smith's account of that bank, Francis' history, and nearly every
other history, without discovering this principle in its formation; in other words,
without discovering that it was formed by making a spurious currency, and without
capital, except perhaps £72,000 which may or may not have been expended when the
bank went into operation. A simple balance sheet presented in Lawson's history of
banking will show the truth of this statement to any tyro in accounts beyond a peradventure.
Two years after its establishment the bank failed, the real cause of the failure
being plausibly concealed by the recoinage of the silver of the kingdom to which
it was attributed, no one caring to notice that the bank notes had expelled an equal
amount of coin, which was sent to Flanders, leaving so much additional debt to pay
and so much less money to pay it with—so much embarrassment in the place of so much
wealth, a double power of bankruptcy to which the advocates of this system are persistently
blind. One who has nothing is poor, but one who has nothing and is in debt besides
is doubly poor, which latter condition is the currency principle of the Bank of
England. Such a currency cannot exist without plundering individuals of so much
capital in the payment of the fictitious price it creates for imports, and leaving
them in debt an equal amount besides.
Here is the balance sheet that I find in Lawson's history. It was presented at the
bar of the House of Commons, December, 1696, by order of the House, the bank being
then under suspension of payment, as I have just said, two years after its establishment:
| DEBTOR |
£. |
s. |
d. |
| To sundry persons for sealed bills standing out |
893,8000 |
0 |
0 |
| To sundry persons on notes for running cash |
764,196 |
10 |
6 |
| To moneys borrowed in Holland |
300,000 |
0 |
0 |
| To interest due on bank bills standing out |
17,876 |
0 |
0 |
| To balance |
125,315 |
2 |
11 |
|
|
| Total |
2,101,187 |
13 |
5 |
| CREDITOR |
|
|
|
| By tallies in several parliamentary funds |
1,784,576 |
16 |
5 |
| By one-half year's deficit of fund of £100,000 per annum |
50,000 |
0 |
0 |
| By mortgages, pawns, and securities |
230,946 |
15 |
2 |
| By cash |
35,664 |
1 |
10 |
|
|
| Total |
2,101,187 |
13 |
5 |
The youngest clerk who ever balanced a set of books will see at a glance that the
bank owed the whole sum of its assets except the balance of £125,315 2s. lid. This
covered its whole capital and contingent fund. For two years it had done an extremely
profitable business, paying eight per cent per annum dividends. It is very possible
that the whole £72,000 paid in was expended in procuring the charter, the granting
of which was strongly opposed in Parliament, where bribery, it is said, was not
unknown, so that it began without a penny of capital, and after paying dividends
had accumulated the balance above mentioned. Yet the bank boasted of having loaned
to the government and paid into the exchequer, before the time stipulated in the
charter, a capital of £1,200,000. He must possess a necromantic skill in accounts
who can discover any such capital in these figures. Why this balance sheet is not
produced by Francis in his apparently exhaustive history of the Bank of England,
and why he should say that twenty-five per cent of the subscription was
paid down, leaving it to be understood that the payment was on account of the £1,200,000
of capital, it is difficult to conceive. The subscribers, however, were to advance
to the government £1,500,000, of which £300,000 was to be returned, having nothing
to do with the capital of the institution, and this without doubt is the "moneys
borrowed in Holland" according to the balance sheet. Francis may have mistaken it
for a payment on account of the capital.
Michael Godfrey, the first Deputy-Governor, sets this matter of capital at rest.
Writing in 1695, he says:
Some find fault with the bank because they have not taken
in the whole £1,200,000 which was subscribed, for they have called in but £72,000,
which is more than they now have occasion for. But, however, they have paid into
the exchequer the whole £1,200,000 before the time appointed by act of Parliament,
and the less money they have taken in to do it with so much the more they have served
the public, for the rest is left to circulate in trade, to be lent on land, or otherwise
disposed of for the nation's service.
This is a precious piece of sophistry which sets at naught the teaching of the nursery,
that one cannot eat his cake and have it too. Its acceptance as truth then and now
is a remarkable evidence of the depth of credulity among intelligent men. The truth
is the bank had no capital, unless the £72,000 was unexpended after procuring the
charter. The government loaned the bank as much as the bank loaned the government,
which was nothing at all. The bank handed into the exchequer its own notes in exchange
for tallies—mere memorandums of unfulfilled contracts—paper and notched faggots
exchanged against each other. The scheme was a manufacture of currency virtually
out of nothing, that is, without value received. The effect upon prices was exactly
the same as if so much gold had been produced and thrown upon the market, but here
was no gold or other value produced, and the price it created was therefore paid
out of pre-existing gold and silver, the precreated money capital of the nation.
The bank borrowed no capital and loaned no capital; it simply loaned memorandums
of indebtedness on which the people subsequently loaned their capital to the government,
and paid interest, or £100,000 annuity, on their own capital thus loaned for the
benefit of the Bank of England. The people, not the bank, loaned the capital to
the government, but the bank held all the securities and took all the profits.
Adam Smith supposed that an excess of convertible paper currency could not be circulated,
because the excess would at once return upon its issuers for redemption. This is
one of his errors, and the more surprising because of the experience of France with
Law's banking sixty years before the "Wealth of Nations" was written. For four years
the inflation continued there, until general prices advanced fourfold, indicating
a fourfold expansion of the currency, and yet the currency did not return upon the
bank for redemption to any inconvenient extent until a few weeks before its doors
were closed in hopeless insolvency, although money was rushing out of the country
all the time. It is a question of confidence on the part of the people; if they
prefer the paper to money, and do not call upon the bank for payment, there is no
difference in effect between an inconvertible and a so-called convertible currency,
and, as we see in the example of France, it is easily possible to press upon a credulous
community as much convertible as an intelligent people will bear of an inconvertible
currency. We have not yet, at any time, with our inconvertible currency reached
the degree of inflation that existed in France with their convertible currency in
1719-20, after three to four years' operation of Law's, and the Royal Bank, which
failed in 1720.
The philosophic action of this spurious currency is to degrade the value of the
whole volume of money or currency to the extent of its increase. The whole convertible
sum of this increase and degradation then runs away, and brings returns in price,
not in value. In other words, the excess of currency thus thrown off is
wholly absorbed in the false price of imports, because the exports will command
only the price determined by the demand measured by the currency of foreign countries.
Adam Smith overlooked this inevitable result of local inflation, and supposed that
the specie expelled by what he calls "paper money" was sent abroad at its normal
value, and necessarily commanded an equivalent value in the imports, but it is never
so. The reason of the shipment of money is because it is cheaper than merchandise
to the exporter, and when it is cheapened naturally by an excess of production,
the excess is a clear addition to the wealth of the country in the capital it commands
in the imports, precisely like an excess of wheat, or beef, or copper, or any other
form of capital that can only be exported when it is cheapened by supply to an exportable
value. But when money is cheapened to an exportable value without any excess of
production, in other words, by making "paper money," the gold and silver sent abroad
is taken from precreated capital, and might as well be plunged into the sea so far
as any benefit accrues to the nation that exports the money, simply because it is
sold and exported at the degraded, and not the natural, value. You will observe
it is the whole volume of the currency that is degraded in value, and only the amount
of the degradation that is expelled, so that the whole amount of specie thus exported
is lost in the abnormal price of imports.
Now the people of the United States are thorough dupes of the Bank of England; they
believe in "paper money" more than they believe in democracy, and so favor privileged
legislation in the matter of currency. It makes no difference to them who or what
issues the note; if it is handsomely engraved and "convertible," they circulate
it in preference to gold, having no conception that they are lending their capital
upon it for nothing, and, in the case of bank notes and bank credits, paying interest
on their own capital thus loaned for the benefit of bank stockholders into the bargain.
Virtually every bank note, or bank debt on account, payable on demand, is a legal
tender; the man who should refuse to accept it would be ostracized—sent to Coventry;
he could do no business unless the note were discredited by some competent authority.
It is a forced loan even from myself and others who see through the iniquity and
falsehood of the thing; we cannot help ourselves; we must accept and circulate bank
notes, pay interest on our own capital, and deal with the banks upon their own terms,
or do nothing.
The notes issued directly by the national Treasury—greenbacks that form two-thirds
of the legal tender—have the advantage of costing no interest to the public, but
the public know nothing and care nothing for the advantage. There is not intelligence
enough upon the subject in Congress to see the saving to the industrious classes,
and the National Bank Act, which is a copy essentially of the principle of the Bank
of England, imposes a needless cost of interest upon the public for the currency
it authorizes. Public writers and professors are busy here writing down the "greenbacks,"
that the banks may have the profit of the circulation in their place. It is doubtful
if they know who pays it.
There is an important advantage in all the national currency, whether furnished
directly by the Treasury or through National Banks, as compared with that furnished
by the State Banks, namely this: the national currency being public debt, directly
or indirectly, forms a fund with which goods are bought and sold as for cash, relieving
a vast amount of embarrassment in individual indebtedness. Whereas the State Bank
currency requires to be fed with individual indebtedness. Goods must be sold on
credit to make notes for the banks to discount into currency, and their system accordingly
forces nearly the whole traffic of the country through debt and credit. But this
again is unheeded; people care nothing about it.
The one idea here is that without a paper currency we should have no money and do
no business. It is a common remark that there is not gold and silver enough in the
world to do the business of the United States; and the notion prevails that "paper
money" is capital, so that the more we have of it the more business we have. Accordingly
it has come to be considered a sort of patriotic duty for everyone to encourage
the utmost extension and circulation of bank and government notes, and of bank credits.
If there be such a thing as blind ignorance here upon any subject, it is the most
dense upon this subject of "paper money"; and if there be an unpopular man in the
nation it is the bullionist. Thus we drive away capital, the only employer of industry,
and substitute debt, the embarrassment of capital and industry, in its place. But
we work hard and cover our foolish losses with a surplus still.
Under these circumstances you may readily conceive that the Legal Tender Act is
a matter of small practical importance. Theoretically it is an act in violation
of contracts; it is ex post facto, unconstitutional, and the essence of injustice;
but its repeal would make no practical difference in our currency, or in the condition
of the national finances. Even in satisfaction of a judgment and execution no court
or individual declines to accept a check or current bank notes. Legal tender is
seldom thought of, and never demanded except in bank settlements at the clearinghouse,
and the repeal of the act could tend only to a further inflation of the currency
by removing all check upon bank discounts and currency-making. There is a possible
ultimate restraint upon the making of fictitious credits by banks, in the legal
tender requirement, but as the legal tenders amount to three times as much as the
specie by which the currency was formerly regulated, we must expect three times
as much currency as under the specie requirement before the restraint can operate.
Still it is something, and better perhaps than no restraint at all.
The Bank of England system enlists the strongest motive to human exertion—self-interest—in
the business of damaging the capital of the country by expanding the currency and
degrading the value of money. The more mischief of this sort they can do, the greater
is the profit of the corporators. Instead of furnishing capital to the people, as
the people generally suppose, it is using their capital and charging them interest
upon it, their money capital meanwhile being forced abroad in pure loss to them
for the benefit of foreign producers. But our people like it, and exhibit a democratic
spirit of independence in ignoring the science which teaches the folly of it.
Asia gets the benefit of this folly of America and Europe, and the precious metals
are driven to the East nearly as fast as they are taken from the bowels of the earth,
because there they escape the contact and depreciation of "paper money." If America
and Europe obtained an equivalent value in return, the benefit would be mutual,
but it is not so.
Thankful for your friendship to my country, and for your earnest support of the
democratic principle in its present terrible conflict with barbarism here, I am
glad of the opportunity to contribute something to your knowledge of our institutions,
and to explain to you the evil nature of our financial system, which is one of the
two greatest evils and antagonisms that the democratic principle has yet to deal
with in this country. The other is the tariff system of "protective" duties on imports,
which by checking imports checks our exports to the same extent, and cripples the
commerce and the industry that the energy and enterprise of our people would otherwise
develop into much additional and enduring wealth. Both are creatures of class or
privileged legislation that are out of place in the institutions of the United States.
But we are a young nation. England is old. And we follow England with a weak subservience
that our self-styled democrats are too ignorant to see, or too conceited to acknowledge.
We did once set up for ourselves in politics in establishing a republican government,
and did well; but we take no step in political economy until England pioneers and
points out the road. From her we received our great antidemocratic institutions
of slavery, protective tariff, and privileged banking for the manufacture of a currency
of debt. From her we have learned to hate slavery and abolish it, and we expect
to follow her lead already taken in establishing free trade. But until she moves
to protect her capital against the encroachments of "paper money," we shall doubtless
continue as blind as we are now, and know nothing of the difference in currency
between capital and debt, and we shall go on sinking our capital by putting debt
into its place.
If I could induce you to lend your pen and your influence to persuade your government
to change its great financial institution from a debt-factory to an honest
bank, with the simple privilege of every honest banker to borrow and lend capital
without limit, it would be something to repay me for much careful thought upon this
subject, and I should feel that I had taken a step to benefit England and my own
country, and the commercial world.
With the highest regard, permit me to subscribe
myself, your friend,
CHARLES H. CARROLL.
West Newton, Mass., February, 1865.
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