Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
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Chapter 27
The Currency Question in the Commercial Convention in Boston
(Reprinted from
Hunt's Merchants' Magazine and Commercial Review, LVIII June, 1868),
418-32.)
I was glad to find that the members of the Commercial Convention in Boston of last
February were generally readers of this magazine. Having had the privilege of presenting
a few remarks, as an outsider, to the Committee on Currency and Finance of that
Convention, by their courtesy, I would like to offer through your pages to the gentlemen
who composed that committee, and to your readers generally, some further explanation
of the views which there was not time to elaborate on that occasion.
Several members of the Committee having urged the need of a lower rate of interest
at the West, as a reason for the increase of banks and currency there, I took occasion
to say that to increase currency in relation to capital is a sure way to increase
the rate of interest, as well as general prices, and that even the supply of money
itself does not change this law, because interest is not a price for the loan of
money merely; it is the rent of capital. It is not, therefore, currency that is
needed at the West to reduce the rate of interest, but capital, since the
more capital there is, the less is its rent, and capital can be obtained only by
labor, or it is the fruit of labor wherever and however obtained.
In support of this doctrine, as to the rate of interest, I presented the example
of California, and stated that money runs away from a high rate of interest all
the world over, as it runs away from that State, where it is 24 to 30 per cent per
annum, to New York, where it is 6 to 9 per cent; thence to London where it is 4
per cent, and thence to Paris, Hamburg, &c, where it is only 2 or 3 per cent.
The question was asked why, under these circumstances, does money leave California?
I could only reply, because of the deficiency of other capital there, California
is too poor to retain the great amount of money she produces, the pressure of business
before the Committee precluding any further explanation.
The question of interest is closely connected with the policy of expanding the currency,
and is important for a reason the reverse of that contemplated by the advocates
of that policy in the Convention. To give the subjects of interest and currency,
therefore, proper consideration, let me repeat that interest is the rent of capital—loanable
capital—and capital is as effectually loaned in wheat, or iron, or groceries, or
dry goods, or in any other form, as in money. When goods are bought and sold on
credit, obviously the rent of the capital is considered in the price of the goods.
Interest includes, always, more or less of guarantee against bad debts; hence a
debt currency, which is a fruitful source of bankruptcy, is a powerful agency in
raising the rate of interest where, from the abundance of capital, it would be naturally
low. There can be nothing more absurd, as the matter presents itself to my mind,
than to expel and repel money with a debt currency, and thus force the business
of the country into the credit system, with all its needless embarrassment and direct
cost, and an increased rate of interest besides.
Money is but one of the exchangeable commodities of commerce, only that it possesses
extraordinary utility as the common equivalent and recompense in exchange, the demand
for which is without limit. To this utility it owes its value, which varies with
the needs and means of payment of all who desire it, differing in this respect not
at all from every other exchangeable commodity. I agree perfectly with Professor
Lieber, that money existed before government; that it is a commodity; and that,
virtually, there are no such two words or acts as buying and selling; there is only
exchange. The blindness of the public in regard to it seems to be owing
to the interference of legislation in separating the unit of money from the ordinary
weights of commerce by which it was formerly known and exchanged. Every student
of the subject knows that the British pound sterling was once a pound of silver,
and the French livre the same. Cheating by the governments made these two units
the meaningless things they are. Our dollar was originally an ounce of silver, and
the German thaler the same.
Gold or silver offered in exchange, or buried in the miser's hoard, for its intrinsic
value, is money. Whoever buys a barrel of flour for a gold eagle is at the same
time buyer and seller; he buys flour and sells gold, and bargains as much for the
value of the gold he sells as of the flour he buys. Whether in bullion or in coin,
whether reckoned by ounces or dollars, until its value is augmented by labor in
the arts, as plate, jewels, 8cc, gold is money.
The rate of interest is opposed to the value of money. That is to say, where the
rate of interest is high, except momentarily sometimes in the crisis of a bank contraction,
the value of money is low, and vice versa. Loss by the depreciation of the value
of money is just the same in every respect to its owner as the loss by the depreciation
of the value of wheat to the owner of wheat. The value of money is as simple an
expression as the value of wheat; it is, of course, its purchasing power, and that
can be expressed only in the thing it purchases. If ten dollars of money purchases
a barrel of flour, so much flour is the value of so much money. If a bushel of corn
exchanges for a dollar, the value of a dollar is a bushel of corn. Where little
money buys much of other things its value is high: where much money buys little
of other things its value is low. Nothing can be plainer; yet, and although this
fact, and the distinction between the rate of interest and the value of money, have
been clearly set forth by the best scientific authority in England—John Stuart Mill—we
find the London Economist habitually calling the rate of interest "the
value of money." I cannot suppose this to be the result of ignorance, but of the
curious and unaccountable persistence with which the practical, so called, and the
theoretical, in political economy refuse to become acquainted with each other. By
this misuse of a significant term the Economist helps to intensify the
corruption of the nomenclature of that science which obscures the subject in the
public mind.
Money is capital, if free of hoards. It is exchangeable or circulating capital,
like every other thing that is offered for exchange, and it is wealth, not currency,
to the miser. It is wanted everywhere as capital and wealth "to serve a purpose
and satisfy a desire" for its purchasing and paying power, and for its
security; functions which nothing else possesses in like degree or in like convenience
and perfection. It finds customers without effort, wherever it is known to exist;
it is the thing promised in debt, both in and out of the currency, and it makes
payment in quality and value all the world over free from doubt or uncertainty.
I say it is wanted as capital and wealth, not as currency, because as currency
it serves only to make price, which adds nothing to value or to wealth. Had we but
one-tenth of the currency we have to-day in this country, other things being as
they are, we should have but one-tenth the price of things in general, but not a
particle less of value in our property and not a particle less of general wealth.
We should have, in that case, simply ten times the value or purchasing power in
every dollar of our currency, and, were such an extreme case possible, it would
give us a wonderful advantage in commerce over every other people on the globe.
Who could compete with us in the production and sale of anything that we have the
natural soil and ability to produce, or the ability to procure? Who could make such
profits in foreign trade as we? The barrel of flour, costing ten dollars now, would
cost but one dollar then, and we could exchange it, say with England, for a yard
of broadcloth of the present currency value of ten dollars, which, no matter what
might be its price, would cost us but one dollar, because our imports cannot cost
any more than the exports that pay for them. Could we not then supply France and
Germany with broadcloth cheaper than they could make it? Could we not build ships
and sail them, and supply cargoes, cheaper than any other people? Who then but we
would cover the ocean with ships and steamers, and conduct the carrying trade of
the world?
And what prevents us or any other people from realizing this imaginary advantage?
Simply the irrevocable law of value in exchange, by which money, as capital, the
great object as well as instrument of commerce to all nations, flows to the market
where its value is the most; that is to say, where the least money will exchange
for the most of other things. This being so, no folly can be greater than legislating
for a supply of currency, since money itself is naturally in repletion everywhere
to prevent any one country or people from having the advantage of others in international
trade, except by the normal exercise of industry and intelligence in producing and
cheapening capital.
The more of anything there is produced, the cheaper it is, of course; but this fall
of special value is nevertheless an increase of wealth. The miners and the State
of California are enriched as much by producing money, although cheapening it all
the while, as they would be by producing a like value of wheat. This fact stares
us in the face in the rapid strides of that new State to wealth, and puts to shame
the speculative theory of certain scholars and writers that money is not capital.
It would be as absurd to oppose the cheapening of money by its increase, as of Indian
corn or wheat by an increase of the crops. But to cheapen money, as currency, without
increasing it, as capital, to compensate the depreciation and supply the export
demand which that depreciation creates, is quite another thing, that should be restrained
as rigidly as counterfeiting, for it amounts to the same thing in its effect upon
the wealth of the nation. A bank that has nothing to lend, and lends that nothing
in a promise to pay money on demand, creates a fiction, and puts it into the currency
to the degradation of the value of money, and loss of capital to the community,
as effectually as the counterfeiter who does the same thing, the difference being
only in the intention, and in public credulity which believes in and accepts the
one and rejects the other.
This same thing, in principle, has been tried in dealing in wheat in Chicago: but
it lacked that support from public credulity, or, as it is called, "confidence,"
which is so freely granted in dealing in money under the name and cloak of banking,
a useful and naturally an honest business, the name of which is used to cover a
multitude of sins. The quality of wheat, as of gold, may be uniform, and determined
accurately by competent inspection, and the supply of various owners may be stored
in bulk of one grade, and delivered in detached parcels, regardless of the distinction
of ownership without injustice to anyone. Thus, as everyone knows, wheat is stored
and delivered in Chicago. The warehousemen issue receipts, or certificates of deposit,
as the wheat is received, and by and on those certificates it is sold and delivered.
These men were not slow to discover that, as wheat was coming and going continually,
and keeping their warehouses replenished, they could establish the "credit system"
in the business, by dealing on their employers' capital, counting upon an average
forbearance of demand, without borrowing or paying interest for it. In other words,
they could issue certificates of deposit for wheat that was never deposited or produced—fictitious
bushels of wheat in promises—cause sales to be made by those certificates, and meet
them out of their employers' supplies.[1] Some of them did this thing; how many or
to what extent is immaterial, and whether with or without intentional wrong is also
immaterial to our argument, which is concerned only with the principle, and that
is swindling. The Illinois legislature so considered it, and passed a law enacting
that any person who shall negotiate or put in circulation any such receipt "shall
be deemed guilty of felony, and, on conviction thereof, shall be fined in a sum
not less than one thousand dollars, nor more than five thousand dollars, and imprisoned
in the penitentiary not less than one nor more than five years." Some failures among
the warehousemen, I think, brought this law about.
Nevertheless, the same thing is done with money in Chicago and elsewhere not only
with impunity, but with encouragement. It is popular among the commercial nations;
it is not banking, which is dealing in loanable capital, but currency-making, the
illegitimate, fictitious "credit system" of the Bank of England. You deposit, say,
one thousand dollars of coined money in a bank, and the bank will promise to deliver
it on demand to four other men as well as to yourself; that is, will lend its employers'
capital on the Chicago certificate and Bank of England plan four times over by discounting,
without borrowing or paying interest for it, each of the four customers having the
same privilege of checking upon your money that you have, the bank counting upon
an average forbearance of demand, by circulating its debt in the place of money,
so that 20 per cent reserve of specie will enable it to meet these preposterous
promises. Whether the promises are in certificates, i.e., notes issued, or inscribed
credits called "deposits," makes no difference; the bank creates a fiction of dollars
of money, as the Chicago warehousemen created a fiction of bushels of wheat, and
with the same effect in degrading the value of circulating capital.
In this country 20 per cent of specie is considered ample for the bank reserves;
in England 33 1/3 per cent; in France, I think, rarely if ever less than 40 per cent;
and the Bank of France, the only currency-making institution in that country, is
apt to be in trouble at that; for France has had such sharp experience with "paper
money" that "confidence" is not quite sufficient there to give it free scope.
If there be any difference in principle or effect between the spurious wheat traffic
of Chicago, now suppressed, and the currency-making of banks, which is encouraged,
in degrading the value of circulating capital to the loss of its owners and the
country, I must say that, after many years of careful study of the subject, aided
by practical experience in active business, I cannot see it. The loss falls first
upon the owners of the capital in the local market where the spurious loan is made,
and ultimately is distributed through the country.
"Everything," says De Quincey, "that enters a market we find to have some value
or other. Everything in every case is known to be isodynamic with some fraction,
some multiple, or some certain proportion of everything else." It is by this law
of equivalents, this isodynamic or equal force and intensity of value, tending to
an equilibrium constantly, but never resting, that money moves from place to place,
and that every fraction of capital is attracted by and to every other fraction of
capital throughout the commercial world.
"New countries are always understocked." California is understocked. She has not
a sufficiency of other capital to reduce its general or average value to a level
with her natural and large supply of money, or, what is the same thing, to raise
the value of her money to a proportionate or isodynamic[2] equivalence with her other
capital, and it is impossible that she should have it, because of her insufficiency
of population and productive power. Hence, capital in general is dear there in money
value and real prices are high; in other words, money is cheap; and money as cheap
capital leaves California, as wheat and corn leave Illinois, being attracted abroad
by other capital according to supply and demand.
No matter what may be the currency in use in this country, whether dollars or promises
to pay dollars in circulating notes or demand deposits, so far as it is interchangeable
with money, or passes for money, it will follow the California rule of running away
from dear capital—from the market where capital is relatively scarce to the market
where capital is relatively plenty—from the poor State to the rich one. The western
Atlantic States cannot retain a dime more of it than will be naturally attracted
to them by their circulating capital; and, if they make a currency of debt among
themselves, that currency will as surely fall into the hands of Eastern creditors,
in the cities where capital is in greater proportion to currency, as does the surplus
money of California. But the result will be widely different; they send out in such
case not money and capital, but debt and embarrassment, to return and plague them,
whereas California sends money and capital that pays as it goes.
Not that California is ever out of debt to the eastern States. She is comparatively
poor, as I have said, and borrows capital of them, by buying goods on credit, her
surplus money being of no more advantage to her than an equal value of wheat or
of any other surplus capital is or would be. But by avoiding a debt currency, she
secures exemption for her capital from a great amount of utterly needless embarrassment,
pro and con, in the notes and bonds of individuals for and against the notes and
credits of banks, required for no purpose but to create and maintain such a currency,
which, in the nature of the case, by expelling and repelling money, precludes a
like amount of sales for cash in prompt exchange. At the same time she secures the
production, export, and exchange for foreign goods, of large quantities of wheat
and other staples that she would not otherwise produce, because the export demand
would fall upon the cheapened commodity, money, which would be exported in their
stead.
Many a bushel of wheat and of barley, many a pound of wool and gallon of wine, are
produced and exported by California more than she would produce if the prices and
cost of these staples were raised by a paper currency, since every step in the direction
of high prices limits their market. Her facilities for producing these things are
such that, notwithstanding her cheap money, she supplies them as cheaply, and, being
equivalent thereto in value, they unite with money in the exports. But let her mix
paper with her money, and the first dollar of it will be an abnormal depreciation
of a dollar in the value of her money, which, there being no new dollar produced
to compensate the depreciation and supply the export demand, will inevitably cause
a dollar to be exported from her pre-existing stock of money, instead of merchandise.
She will have precisely the same additional price to pay for her imports as if she
had a new dollar to pay it with, and she will lose the money absolutely in an old
dollar by having only paper price, not money value, returned for it.
California might in this way, by adding paper dollars to her circulating medium,
nearly divest herself of money, and, notwithstanding her vast production and receipts
of gold, come into line with her sister States in suspension and bankruptcy. It
is a wonder to me that she has not been prevailed upon to do this already—that cunning
men have not persuaded the people of California that they need more "money" to transact
their business, and that banks have not been crowded upon them to borrow their capital
blindly for nothing, and charge them interest upon it, by calling the instruments
of this borrowing "money." It is a blind scheme by which the first principles of
justice and common sense in the employment of capital are reversed, and its lenders
are made to pay interest to its borrowers, or rather its takers; the result being
that so much capital is withdrawn from its owners and the country, and irrecoverably
lost. California needs this sort of thing precisely as much as any of our western
Atlantic States, or as any other place in the wide world, and that she has it not,
argues that she is favored with leading minds wiser than those of Australia where
it prevails with a natural excess of money, and where the list of bankruptcies is
unexampled and appalling.
The proportion of wealth, active and inactive, to money in circulation is naturally
about as 25 to 1; and when a currency that is a mere medium of exchange and not
money, is mixed with money, or, as in our present experience, takes the place of
money, the proportion of wealth to the whole currency continues the same—that is
to say, the aggregate price of the property of the country is twenty-five times
the sum of the currency. There is in property what is called by an excellent economist,
J. Y. Smith, Esq., of Madison, Wisconsin, "a greediness of price," which secures
this result. Every new dollar that enters into the circulating medium is soon taken
up in the price of things, and if the dollar is money, the product of labor, that
price is value; otherwise it is price without value.
Mr. Calhoun, in his speech, March 21, 1834, on the recharter of the United States
Bank—one of the most suggestive speeches on banking and currency, I think, ever
delivered in Congress—suggests 1 to 25 or 30 as the proportion of circulation
to the aggregate property of a community. If by this term "circulation" he means
to exclude the demand deposits from the currency I object to the idea and to his
reckoning, for it is impossible to find the slightest difference in principle or
effect between a bank note and a bank deposit payable on demand. The bank note is
but a check of a bank upon itself—the holder of any sum of bank notes pays out as
much as he has occasion to use at the moment, and keeps the remainder for future
use in his iron safe or his pocket. So the owner of a bank deposit pays out in a
check the sum he has occasion for at the moment, and keeps the remainder for future
use in his bank. It is not the payment, the mere manipulation of the paper, that
operates upon the value of money and the price of things, but the whole sum of the
demand debt, since the whole acts as a purchasing power precisely as the whole of
any commodity in market acts upon the value of that commodity, although nine-tenths
or any other portion of it may be at rest in warehouses and seeking demand all the
while. Everyone operates in money or goods with reference to his means at hand.
As this question of the nature of bank deposits came up in the currency committee
referred to, I desire to be distinctly understood in reference to it. No one doubts
that one thousand dollars of coin and one thousand dollars of bank notes in your
counting-house safe, which you are circulating in various amounts by daily or occasional
payments and renewals, constitute two thousand dollars of currency. Suppose you
transfer the whole sum to a bank, check upon it, and renew the deposit to suit your
purposes; in what respect is the principle altered or the currency character of
the two thousand dollars changed? Or suppose your wife takes one hundred dollars
in coin and bank notes to go a-shopping, is not this sum currency? The demand she
makes at the shops enters into or is a part of the average purchasing power of the
whole circulating medium of the country and the world, and tends to raise prices
whether she spends any of the currency or not, and this demand is, of course, in
the one hundred dollars; for if you did not possess it, someone else would, and
would exercise the average demand in it as you do. But your wife meets with no satisfactory
bargains, and the currency is deposited to your credit in bank. Is it any the less
currency than when it was in her hands? Again, you sell a quantity of coffee for
a merchant's note which you get discounted, and the net sum of the discount is added
to the deposit to your credit. You check upon this sum as you did upon the coin
and notes. All these items are mixed into one deposit, one power, and one effect.
You make an average use of this deposit, as you make an average use of the goods
in your warehouse, in the operations of exchange; and, in the long run, there will
be a proportional amount and purchasing power of currency and of goods at rest in
this way throughout the community. Yet all are in circulation, because all are being
offered in exchange.
As to the word "currency" there can be but one rule for its interpretation, and
that is very plain. Currency is what and where money would be under a metallic system
of like volume, free of hoards; and it is obvious that, under such a system, a great,
if not the greater, part of the money employed in trade would be in banks on deposit
subject to check at sight; and another great part would be held by the banks against
certificates of deposit in circulation instead of bank notes. This simple rule distinguishes
currency from the ordinary commercial notes, bills of exchange and ledger debits,
which are of the nature of mortgages on property, and represent capital as against
money when offered in market. No one pretends to consider a promissory note or bill
on time, received for goods, as money. No one debits it to his cash account, and
no debtor holds money in reserve against his bills running to maturity. The effect
of selling such bills in market is to convey the equitable ownership of so much
of his goods or capital; it is to demand money or currency, and so far to appreciate
the value of money and reduce general prices.
Whereas, if the note is manipulated by a bank, and its proceeds are mixed with money
in a deposit, the sum at the credit of the depositor acts as it would do under a
metallic system on the money side of the exchanges, as money or currency against
other capital, tending to depreciate the value of money and raise general prices,
directly the opposite of its power as a promissory note.
I beg leave to dissent from the opinion of John Stuart Mill and the English country
bankers on this point entirely. Under an exclusively metallic system such bills
would exist and be discounted by banks for money actually in their possession. The
bills, if sold, would act then, as they act now, as other capital before the discount,
and as money or currency in their proceeds afterwards. In their nature they are
instruments of legitimate credit having no tendency to inflation whatever. The source
of inflation, and of the commercial crisis, is in the nature of the system which
pretends to lend money, but creates currency by discounting such bills when there
is no such money in existence. The English bankers endeavor by their argument to
escape the odium of the commercial crisis, and cast it upon the increase of credit
in overtrading; but they are in error. Prices are raised by currency, not by simple
credit.
In computing the currency, of course, the bank reserves must be deducted from the
total of bank demand liabilities, and placed where they belong in the reckoning,
or we shall reckon the same thing twice over. Then adding the net sum of these liabilities
to the money in circulation, and now to the outstanding government notes also, we
have an amount of currency that is as 1 to 25 of the aggregate price of the property
of this country, as nearly as an estimate can be made. Reckoning thus, by the aid
of the bank returns at Washington near January 1, 1861, I find the currency in the
latter part of 1860 amounted to 640 millions of dollars, which sum multiplied by
25 gives 16,000 millions of dollars as the aggregate price of the property of the
country. This corresponds with the census estimate of 1860.
As London is the settling place or great clearinghouse of the commercial nations,
we can determine by the course of sterling exchange very nearly the relation of
our currency to its natural volume at any time. Nine and a half per cent nominal
premium for sight bills, as every merchant knows, is the true par of exchange on
London. By the latter part of 1860 sterling exchange had fallen below this point
materially, indicating very clearly that the currency was below the true money volume.
Had there never been a bank note or uncovered demand deposit in existence, we should
have had 640 millions of dollars of gold and silver in circulation at that time
unquestionably. As it was, we had but about $200,000,000; 440 millions of money
being repelled by the kiting of debt against debt to maintain a bank currency within
the amount naturally belonging in solid money to the capital of the country. I believe
that capital has increased so much that, but for the repulsive power of the debt
currency, we should have at this time 800 millions of gold and silver in circulation,
instead of which we have a mixture chiefly of poverty and embarrassment, amounting
to 1,400 millions, maintaining average prices at 75 per cent above money value,
real estate being now in the greatest fever of inflation, other things having subsided
a little to make room for it.
Now, in view of the ratio of 1 to 25, let us inquire what California would need
to do to retain the gold she now sends away, and we may learn what any State must
do to avoid sending to other States a currency of debt to her own loss and embarrassment,
instead of merchandise to her profit and advantage. In round numbers the population
of the United States in 1860 was 32,000,000. It will be observed, therefore, that
the average of currency was $20 per capita for the whole country. California cannot
retain so much as this, because she is young in enterprise and opportunity, and
her capital does not equal the average of all the States. But allow her, for argument's
sake, $20 per capita, and, her population being in round numbers 400,000, she can
retain but $8,000,000 of money free of hoards. What she may retain in hoards is
of no consequence to our argument, as it is of no consequence in commerce, nor in
determining the value of money. The aggregate price and real money value
of the developed property of California is, then, $200,000,000, according to my
computation as 25 to 1 of the currency, and this sum is, I think, an extreme allowance.
San Francisco receives yearly $50,000,000 of gold, which, the currency of her State
being full, she sends to the Eastern States, and to foreign countries. To retain
this gold California must produce, every year, one thousand, two hundred and fifty
millions of dollars ($1,250,000,000) of wealth of all sorts, over and above her
present annual production. This, and nothing less than this, as 25 to 1 of the money,
will enable her to retain all this gold. Any one may see at a glance the impossibility
of her doing any such thing, since after eighteen years of great industry in mining,
and in every other sort of production that would present a promise of profit to
the most acute and enterprising people that ever colonized a country, she has accumulated,
altogether, but 200 millions of property.
Here let me remark that I prefer this method of estimating the wealth of a community
to the most elaborately prepared statistics, since every portion of wealth, whether
in market or out of it, must have an estimation in price, and that price must depend
upon and fluctuate with the volume of the currency. It is possible to make a comparatively
satisfactory and accurate computation of the currency of this country from the ample
returns of the banks to the government, intelligent commercial estimates of the
movements of the precious metals, and the treasury report of its own issues. No
other nation is, or ever was, so well supplied with information in these particulars.
Merchants and bankers generally know how to keep accounts and state them. But it
is impossible to make anything satisfactory out of the figures supplied by the various
government agents, widely distributed over this great country, who are selected,
not for their competency, but for their politics, or the politics of those who have
an interest in finding them employment. Many of these men are turned into office
ignorant of the work they have to do, and turned out again before they have time
and opportunity to learn it, if they would, by the whirligig of partisan politics
which turns upon the rule: "To the victors belong the spoils," ignoring experience
and qualification entirely.
The Director of the Bureau of Statistics, Mr. Delmar, in his report to the Secretary
of the Treasury, November 14, 1867, gives some instructive and amusing examples
of the character of government returns that deserve attention in this connection.
Referring to certain tabular statements, of a few years past, he says:
The tonnage returns were swelled with thousands of ghostly ships—ships that had
gone to the bottom years ago. Newport swelled her coastwise movements with the daily
arrivals and departures of the Sound steamers; and at some of the border districts,
every time a ferryboat entered and left a slip, her tonnage, against a standing
regulation of the department, found its way into the account of the foreign entrances
and clearances.
The collector of Pembina reported that he had erroneously returned imports for exports,
because he had a felon on his finger.
The imports for 1861 have been variously reported at $286,500,000, up to $352,000,000;
those of 1862, from $205,700,000, to $275,300,000; and minor discrepancies follow
in l863-'4-'5. The exports of 1861 are returned in different reports all the way
from $227,900,000 to $389,700,000; those of 1864 from $281,800,000 to $320,200,000;
and differences of smaller amounts occur in those of l862-'3-'5.
Now, if the customhouse can do no better than this, what can we expect of the departments
of more recent and imperfect organization? In computing the wealth of the country
I am better satisfied to rely upon the currency.
Returning to California experience, we find that State cannot keep her yearly surplus
of money, $50,000,000, in circulation at home, unless she can make a yearly addition
to her property of $1,250,000,000 in money value.
By the same rule Illinois, for example, could not keep $10,000,000 of bank currency
in circulation, in addition to her present supply, unless she could simultaneously
produce $250,000,000 of wealth of all sorts over and above the regular production,
measuring price by the existing depreciated currency. And if she produced the wealth,
she would have the currency without producing it, because she would sell goods to
other States and receive their currency in return. It is beginning at the wrong
end of the operation to make the currency before the capital, because if she does
so she will buy goods of other States, remit currency, and run into debt to them,
and into difficulty altogether, unless the currency is itself capital, i.e., money,
and then, of course, she will remit the surplus without embarrassment, and with
as much advantage as she would remit anything else, by paying, instead of running
in debt, for the returns.
The population of Illinois numbers at this time, probably, 2,200,000, and it may
be presumed that her capital equals, per capita, the average of all the States.
Hence, at $20 a head, she can maintain $44,000,000 of currency in money, or at par
with money and no more: multiplied by 25 this gives $1,100,000,000 as the aggregate
money value of the developed wealth of the State. As all but six or seven per cent
of the wealth produced in any State, or in all the States, in any one year is consumed
in the same year, the accumulation of $250,000,000 of value, in addition to the
existing wealth of Illinois, must require much time and labor; but $250,000,000
of price may be added to that wealth in very little time, and with very
little labor—only so much as is needful to make speculations and promises, or fly-kites
of exchanged paper, that by bank discounting will serve for inscriptions of credit
to the amount of $10,000,000; provided all the other States expand their circulating
medium in the same proportion. But if they do not unite in the expansion, if they
keep down their circulating medium to its present relation to capital, Illinois
will buy of them in price more than she sells to them; the $10,000,000 additional
of her currency will be diffused temporarily among the States, Illinois retaining
but her fraction according to capital, and in due time the whole will return "to
plague the inventor" as surely as chickens come home to roost. It is utterly impossible
for Illinois, in the long run, to maintain a dollar of currency in relation to capital
more than the other States.
Let us not forget that science is experience classified and recorded, but its theory
is what men think about it, which may be as wide of the truth as Ptolemy's doctrine
of the immobility of the earth. Illinois has had ample experience of the truth in
this matter of a debt currency, and one would think might by this time have reduced
that experience to science. By simply exchanging bank liabilities, payable on demand,
against the liabilities of various States, payable, as it now appears, mostly never,
she had accumulated a currency of bank notes and demand deposits amounting to $13,000,000,
the banks having only $300,000 of specie to pay it with. This was the work of nine
years—1851 to 1860, and it culminated in extensive financial ruin to the banks and
people of that State.
This, being an addition from time to time to the natural sum of the circulating
medium of the State, by raising general prices and furnishing "accommodation" to
merchants and farmers, encouraged the holding over of domestic products which checked
production, and the sales of merchandise to other States, while it stimulated purchases
from them, and the consequence was, as I have said it always must be with such a
currency, it took the place of money cheapened by excess, and was remitted to the
credit or cities of the east. Thence it returned mostly in the traveling bags of
bankers', brokers' and merchants' agents, who met with all sorts of evasion and
opposition to their demands for payment. They were told that they were paid already.
Was it not money they had in their bags? What more could they want? It is good money,
"well secured currency," said the Illinois people, and when some of these agents
could not see it, they were, in certain interior places where a bank was about as
necessary as the Temple of Jerusalem, hustled and mobbed out of town. This sort
of experience ought to show that debt is not money, and that the promise to pay
a thing is not the thing itself. A crash of bankruptcy sponged the slate of this
business.
It is well to observe in this connection that the wealth of a community naturally
divides itself into three fractions, say two-fifths of circulating capital, two-fifths
of fixed capital, and one-fifth of unproductive, enjoyable wealth. In the fixed
capital I include wealth intended for productive purposes, but not ready for market,
and, therefore, not circulating or offered in exchange. Of these fractions only
one, i.e., the circulating capital, which is in the ratio as 10 to 1 of the currency,
makes any demand for, or has any influence upon, the value of money that will prevent
its export, so that we have only to persevere in the production of circulating capital
to secure the utmost degree of material prosperity, and all the value in money or
currency that we can possibly possess. Any scheme to produce or procure more money
or currency than will naturally or necessarily be attracted by and to this circulating
capital, except on the California principle for export, is worse than folly; it
is mischief, because it increases debt, wastes capital, and substitutes poverty
and embarrassment for wealth.
And it will be observed that in creating circulating capital we increase pari passu
the other divisions of wealth, into which it distributes itself by a law that is
as certain of obedience as the law of gravitation; hence, after all, we must put
twenty-five times the labor into the production of general wealth that we employ
in the production or procurement of money, or it will fall in value, and run away
by its depreciation, which, if natural because of the increase of gold and silver,
is a gain of wealth, like the depreciation of breadstuffs by an increase of the
crops, that, but for this increase of quantity, would not be exported; but if unnatural,
because of the increase of "paper money," it is a loss of wealth, it merely robs
the country of so much pre-existing money and capital, and we might as well throw
so much gold into the sea.
In conclusion, let me advise the reader to bear in mind the experience of California
and Illinois in the investigation of the currency question; and I take leave to
enter a caveat against the deductive method of reasoning on this or any other question
of political economy, which is quite too common; that is, from theory downward to
fact. The opposite or inductive method, upward from the fact of experience, is,
in my view, the true course to pursue with economical questions. Adam Smith's method
is deductive. He supposes a wagonway through the air, which "enables the country
to convert, as it were, a great part of its highways into good pastures and cornfields,
and thereby to increase very considerably the annual produce of its land and labor."
By this downward logic, from the clouds to the earth, he finds a saving of gold
and silver in the use of "paper money." A paper wheel or a paper machine, which
costs less than a metallic one, is another of his metaphors. "A certain quantity
of very valuable materials, gold and silver, and of very curious labor," is thus
saved for other uses than distributing the revenue of society among its members.
Looking from the clouds he does not see that these valuable materials, gold and
silver, form, themselves, like other circulating capital, a portion of that revenue
which is lost by the degradation of their value through the previous increase of
the currency, before "paper money" takes their place.
I have the highest respect for Adam Smith's teaching generally, but this deductive
process of his, to prove the profit and advantage of "paper money," seems to me
inductive nonsense. When we have a wagonway in the air, to reason from,
which transports goods and passengers with the directness, celerity and security
of railways and earth roads, we shall doubtless cultivate the ground beneath with
profit and satisfaction. When we find a paper wheel or a paper machine to do satisfactorily
the powerful work of a metallic one, miners and metal workers will keep holiday
or starve, perhaps, and then it may answer to accept Adam Smith's theory of "paper
money" as scientific truth.
[1]Betting on the price of wheat
is a different thing, because it brings into the market both buyer and seller simultaneously,
and by the same act, and the one balances the other.
[2]Isodynamic, "Logic
of Political Economy," page 49. This scholastic term of Mr. De Quincey's aptly defines
the equivalence of money. Montesquieu supposed money to be the equivalent of all
other values combined, which is an error. It is the equivalent of each particular
thing for or against which it exchanges; but it is the common equivalent, acknowledged
and accepted by the trading world. This is the sole peculiarity of money as an exchange
value. Other values are equivalents, that pay by the higgling of the market, but
money is the only universal recompense accepted without question.
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