Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
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Chapter 28
Specie Payments
(Reprinted from
Hunt's Merchant's Magazine and Commercial Review, LIX (Oct., 1868),
272-79.)
In view of the discussion which occupies public attention as to the resumption of
money payments, it may be instructive to consider whether any legislation or any
voluntary action of the public is likely to bring it about. I may as well say in
advance that I do not think it is. Not from impossibilities in the nature of the
case; but the structure of the currency, the vast powers of self-interest in the
erection and support of it through the banking system; the overpowering debtor interest
which that system creates by its needless kiting of debt against debt, and the hallucination
in the public mind that price is value, so that a decline of general prices is supposed
to be a decline of general wealth, are all opposed to it. Debtors must be wronged
by any contraction of currency necessary to the resumption of specie payments, as
creditors were wronged by the expansion which caused the suspension, and debtors
therefore resist contraction.
There are those possible modes of public policy either of which would restore the
currency to the par of money, and consequently restore money payments, or the mixed
system of interchangeable debt and money, to which we have been accustomed. Neither
of these, in my opinion, will ever be adopted; but there is a third mode of proceeding
that comes of itself, like the rejuvenation of nature in this latitude after a rugged
winter, to which we must look for relief, and in which it will be found. When, however,
is not quite so certain as the return of spring after a hard winter.
Of the three possible and voluntary methods, the first is to stop the currency at
its present volume, and accumulate capital to bring the promise to the par of the
gold dollar. I believe I have heretofore given my reasons in this magazine for fixing
upon $20 per capita as the normal sum of money demanded by the population and capital
of this country.
Population and wealth advance together, in the same ratio, because of the natural
law which peopled the earth up to the annual supply of the means of maintenance,
with slight and temporary exceptions in the violent proceedings of society. In the
United States this conformity is probably less obstructed than anywhere else, and
the ratio of increase is, approximately, 3½ per cent per annum, simply compounding
each decade.
Assuming the real money value of the property of the United States to have been
$16,000,000,000 in 1860, as stated in the census, the following tables will show
its gradual accumulation, beginning with nothing in 1770. Of the wealth existing
at that time nothing remains excepting the land, and some few old buildings, the
natural appreciation of which from the increase of population, and the cost of cultivation,
improvements and repairs, amount to more than it was worth then. Hence it is fair
to assume that the wealth of the nation has all been created since 1770.
It is remarked by John Stuart Mill that, "The greater part, in value, of the wealth
now existing in England has been produced by human hands within the last twelve
months." The power of reproduction is not less, proportionately, in the United States.
But as, with population, everyone who is born dies, so, with capital, every portion
produced is consumed, and accumulation results from reproduction. Of the wealth
produced each year all but about seven per cent in value is consumed the same year,
whether in peace or in war, leaving net gain on the whole, as shown in the tables,
of about 3½ per cent per annum.
For the inhabitants in the latter table I adopt a formula from the Treasury Department.
On this scale of increase which for easy reckoning we may call 3½ per cent per annum,
we have gained 8,800,000 inhabitants since 1860, and have now, in round numbers,
| RECKONING BY DECADES FROM 1770 |
| Date |
Inhabitants |
Accumulation |
| 1780 |
3,000,000 |
$422,221,369 |
| 1790 |
3,929,827 |
553,085,646 |
| 1800 |
5,805,937 |
746,759,996 |
| 1810 |
7,239,814 |
1,018,934,728 |
| 1820 |
9,638,191 |
1,356,483,402 |
| 1830 |
12,866,020 |
1,810,769,530 |
| 1840 |
17,069,453 |
2,402,362,610 |
| 1850 |
23,191,876 |
3,264,035,218 |
| 1860 |
31,443,322 |
4,425,347,496 |
| Differential fractions |
|
5 |
|
|
|
|
|
$16,000,000,000 |
| ANNUAL INCREASE FROM 1850 TO 1860 |
| Date |
Inhabitants |
Accumulation |
| 1851 |
24,250,000 |
$392,765,566 |
| 1852 |
24,500,000 |
396,814,696 |
| 1853 |
25,000,000 |
404,912,955 |
| 1854 |
25,750,000 |
417,060,344 |
| 1855 |
26,500,000 |
429,207,732 |
| 1856 |
27,400,000 |
443,784,599 |
| 1857 |
28,500,000 |
461,600,769 |
| 1858 |
29,500,000 |
477,797,287 |
| 1859 |
30,385,000 |
492,131,206 |
| 1860 |
31,443,322 |
509,272,337 |
| Differential fractions |
|
5 |
|
|
|
|
|
$4,425,347,496 |
a population of 40,000,000, and wealth in real money value $20,000,000, demanding
money for its circulating medium to one twenty-fifth of its amount, or 800 millions
of dollars. Less than this of circulating capital in gold and silver we could not
have, as money, if the paper folly that we call money were removed from its path,
and more we could not retain without an equivalent increase of other capital.
But the currency of this country, embracing bank demand deposits and balances that
would be money under a metallic system of equal volume, amounted at this time to
not less than 1,400 millions of dollars, being 600 millions more than the sum of
money we can hold unless in absolute hoards.
Hence, by the rule of three, as 14:8::l:57/100. The currency dollar of to-day has the
average power as a circulating medium of 57 cents of money; or, what comes to the
same thing, our general or average prices are advanced 75 per cent above the true
money value, at which they stood in the census year 1860. The problem is to raise
the power of this depreciated currency 43 cents in the dollar, an increase of capital;
in other words, to reduce general prices from 175 to 100, or from 100 to 57, which
is the same thing, without contracting the currency. This could be effected in about
twenty-one years by an average increase of capital, yearly, of 3½ per cent. Thus,
suppose corn to be one dollar per bushel to-day, and we make an exponent of that
commodity for our reckoning:—
| 1868 |
100 |
bushels |
$100 |
or |
$1.0000 |
per |
bushel. |
| 1869 |
103 1/2 |
" |
100 |
or |
.9662 |
|
" |
| 1870 |
107 |
" |
100 |
or |
.9346 |
|
" |
| 1880 |
173 1/2 |
" |
100 |
or |
.5764 |
|
" |
In the latter part of 1889 we should have 175 bushels for $100, the price per bushel
being 57 cents; and commodities in general and services would increase in quantity
and fall in prices accordingly. That is to say, we should have thirty-five thousand
millions of property, in real money value, to be measured in price by fourteen hundred
millions of currency, being an increase in the total wealth of the country of 75
per cent, and a fall in price of 43 per cent, when our currency would be at par
with the gold dollar, and money payments would resume themselves.
It is simply ridiculous to suppose that our people would submit to any such lingering
process as this, or that production and trade could proceed under it. They are always
and immediately checked by a general fall of prices.
As population and capital accumulate a fraction more than 3½ per cent per annum,
and compound each decade, we should by this process reach the par of money with
our currency, and money payments accordingly, in rather less than nineteen years;
but this does not help the case materially. It might as well be a thousand years,
as ten or five, of a lingering fall of prices. No such nonsense will be endured
voluntarily by the laziest man of common sense among us.
The second plan I propose to consider is to contract the currency legally and gradually,
as proposed by most of our financial writers. Suppose we try the effect of a contraction
of 100 millions a year. This would cause a fall of prices, first as 14 to 13, then
as 13 to 12, then as 12 to 11, and so on, exceeding by a fraction of nine per cent
per annum for four years, and compounded with the usual increase of capital, which
we have discussed above, it would make the fall of general prices 11 per cent per
annum for four years, or 44 per cent altogether in that time. As we need but a fall
of 43 per cent, this would bring us to a par currency and money payments within
the four years.
But this also is too long suffering and too much of it. Any man of good business
knowledge may see this at a glance. No such business can be done in this country.
The third proposition to which I ask attention is to support two currencies, separately,
for a term of years as short as may be possible, one of gold and one of paper; but
the government must make the paper and control the whole debt currency rigidly and
entirely. It must buy the interest-paying public debt for new greenbacks as fast
and as far as the bank notes and demand deposit, uncovered by the reserves, can
be suppressed, so that the paper currency may be kept full to enable the banks and
individuals to discharge their paper obligations with paper at paper prices, and
make subsequent contracts for gold. But this power to issue new greenbacks should
be in the hands of commissioners to be exercised only to make good the sum of bank
currency withdrawn, and prevent a great and sudden fall of paper prices and a financial
crisis. Great firmness, integrity and discretion would be indispensable in the exercise
of this power.
If five years for example were granted for the circulation of the paper, it might
and should be left free as a medium of exchange for all purposes according to the
desire and agreement of parties during that period. But the funding system would
remain, and it is my belief that the tendency to depreciation of the paper, in the
divergence of prices from the gold standard, although modified and restrained by
the funding, would be such as to cause the whole to be funded voluntarily during
the five years, leaving us at the close of that period a pure metallic currency.
Any possible balance then outstanding should be coercively consigned to the funding
process. This would leave the banks free to borrow and lend capital, though the
instrumentality of money, without limit, and judging from the operations of well-conducted
trust companies, they would soon carry their loans to twenty times the amount of
their stock capital, since they would be unembarrassed by fictitious credit in their
demand liabilities. This fictitious credit in discounting debt out of itself into
so-called "deposits," and not out of the pre-existing currency, cripples their
loans, on the average, to less than two-thirds over and above their capital stock
under specie payments. What trifling business is this compared with what they might
do for the benefit of themselves, and the public with an unadulterated currency!
Legislation would be necessary in this case to protect old contracts existing prior
to the suspension in 1861-2.
Objection has been made to this plan, that two currencies of unequal cost and value
will not circulate together; the less will drive out the more valuable one; which
is true if the two are interchangeable, but not otherwise.
We have the two currencies now, unsupported by law, but supported by public opinion
and integrity in spite of the law, that is, in spite of the paper tender act. California
ignores that act entirely, employs money, not debt, for her currency, and buys and
sells the greenbacks as she buys and sells other public securities, for their marketable
price in money. And our merchants continually traffic for gold in exchange for their
merchandise, especially for imported invoices, relying upon the integrity of the
debtors. I am not aware that anyone has been base enough to tender greenbacks for
gold in discharge of a gold contract. He could do it with impunity in law, but not
in public opinion. But we want to get rid of this legal inequity, which so far as
it has any real power, supports rogues against honest men, encourages debt, and
the absence of capital, the thing upon which all business depends, by driving capital
in money out of the country, through an abnormal depreciation of its value in the
high prices we pay for imports. It is opposed to all true progress in commerce and
national finance.
The great obstacle to this plan of a double currency, or of two currencies, is the
huge power of fictitious credit in the banking system, which, as I have said, cripples
the loans of the banks and their usefulness, and, in my opinion, ultimately, their
profits also. But they believe in it, the people believe in it, and it seems useless
to argue that we cannot have the value or the use of money at home and send it abroad
at the same time, or have our cake and eat it too, which is what the so-called credit
system attempts to do through the circulation of bank debt in the place of money,
and pretends to accomplish.
While this delusion continues, although we might, by the use of two currencies for
a time, slide easily from the paper currency with its false prices, to a metallic
currency with its true prices, and avoid financial crisis, we shall not do it. Moreover
we are likely to have a decision of the Supreme Court adverse to the constitutionality
of the paper tender act, which may embarrass the greenback circulation, or remove
it altogether.
I imagine that circulation might be continued without the legal tender attribute,
for the purpose of withdrawing the bank currency, with a saving to the public of
the interest paid to the banks on their circulation, and on their fictitious deposits
also; but Congress and the people are not up to this idea and, therefore, any third
plan of restoring specie payments, and without a crash of bankruptcy the only one,
must also be set aside for the present as impracticable.
The fourth and last plan is the old one that comes like the Ghost in Hamlet,
as the consequence of evil-doing. We have become familiar with, if not fond of it.
"Art thou there truepenny?" Sponge the slate with bankruptcy. This is the old remedy,
and the only practicable one, since our people will not tolerate any other, nor
take warning from their repeated sufferings to prevent the evil which renders the
remedy necessary and inevitable.
Undoubtedly this event will be exhibited in due time by the failure in legal tender
reserves of some of the large National Banks, or of some other expanded financial
institution bearing the same relation to the banks as did the Ohio Life and Trust
Company in 1857, the lesson of which may be read in a child's row of blocks, when
one tumbler knocks down the whole line. There is nothing in the system to prevent
the failure of the banks in greenbacks, as they have already failed in gold. They
have the same temptation to expand and depreciate the currency for the gain of their
stockholders, and they are proceeding, as before, in discounting debt out of itself
into new "deposits," and not out of pre-existing deposits or currency of any sort.
Of course the end is certain, but how near no one can tell.
Of all possible blunders in public economy, that of expanding currency as such,
in relation to capital, is the most inexcusable and wrongheaded, because of the
self-evident truth of the proposition that the nation or the community having the
least currency in proportion to capital has the most valuable money, and thereby,
to the extent and power of its capital, the control of the commerce of all others.
And without the expansion there can be no contraction. Mining gold is producing
capital, and gold is money, or currency, to which there can be no objection, as
any excess of gold is exportable; but there is no exporting an excess of paper "money."
While money is the common instrument of the world's commerce, by simply letting
it alone we can maintain its value at its highest power, and take the lead of the
European nations in commercial enterprise, because they do not let it alone. Every
one of them, with the unimportant exception, I think, of Switzerland, tampers with
money by adulterating its currency with paper. But we have outdone them all in the
folly until we are steeped in debt for money and money value that have no existence,
under the strange delusion that the medium of exchange is the only attribute of
money, and that capital wealth and the power of payment are not indispensable
elements of nature. We lend our capital on a mass of public and corporate debt as
a medium of exchange, shut our eyes to the fact of the absence of so much capital,
and so much means of doing business, and call ourselves paid.
With this degraded currency in hand, if the mission of the Chinese Embassy and the
aims of the Pacific Railroad Company have any significance, we are about to suffer
ourselves to be plucked, in our central position, by a vastly extended commerce
on both sides of the Continent. China and Japan, especially, will sell us their
luxuries and knickknacks in enormous quantities at our high gold prices, that is
to say, at the low artificial value we put upon gold, and carry away solid money
as the cheapest thing we can sell them in return. At the present writing our general
prices are as 175 of currency to 100 of money value, whereas, because of its nonusage
as the common circulating medium, we are selling 100 of gold for 144 of currency.
There is nothing, I think, that we are selling so cheap.
Having in prospect a vast increase of our commerce with the Eastern nations, who
maintain by their industry and their exclusively metallic system the highest value
of money, there never was an hour when a prophet in political economy was so needed
in this country as now.
Except by and through general bankruptcy we shall not bring about specie payments,
unless we can by law or sufferance circulate two currencies long enough to cure
the disease of depreciation, as "like is cured by like" in homoeopathy. On this
principle we must offset the debt currency against the needless public and private
debt which is its counterpoise, and extinguish them both together. This we can do
without a crisis; but woe unto debtors, including the government, and especially
the administration of the time, if the government ever undertakes to experiment
in any other way upon the financial system of the nation.
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