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Tu Ne Cede Malis

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

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Chapter 3
Change of the Banking Principle

(Reprinted from The Bankers' Magazine and Statistical Register, VI (Jan., 1857), 197-505.)


I beg leave to occupy a few pages of your Magazine with some suggestions relative to banking and the currency. From habits of thought, early acquired in this direction, I have, during my business life, felt more than most men the great importance of the subject to this country.

Early in life it seemed unaccountable to me that a community, as intelligent, enterprising, inventive and industrious as ours, should be individually so unsuccessful in business; laboring with cankering anxiety early and late, to fall into bankruptcy so generally at last; while the nation, as a unit, is in a state of vigorous prosperity. The figures of the late General Dearborn, of Massachusetts, showing that 95 or 97 of every 100 who enter into trade, fail once in their lives, or die in poverty, were startling; but an observation of many years, among traders great and small, confirms their truth to my mind. If we inquire why such widespread disaster should attach to traffic here, and be unknown in the experience of any other nation, we are usually answered that it is the result of our great enterprise and activity—an overanxiety to accumulate wealth. This, it appears to me, is the very reason why failure should not occur. The certain way to succeed in anything is to be in earnest, and defeat, under such an impulse, is the exception, not the rule, in everything but traffic in our country. Certainly the best provision for acquiring property, and for paying debts, is constant and active employment. Work must produce capital; nothing else can: the enterprise of the merchant in distributing it, in opening new markets, discovering new wants, stimulating labor, and directing it into profitable channels, is of a character to deserve success, and would secure it, were his operations sustained by an uncontractible and sound currency.

The evil, I think, lies here, and nowhere else; it is in the unstable currency; the power of expansion and contraction in the system of banking; the system of granting credits and issuing notes as money, which are not money, but simply debt.

I believe the existing banks could reform all this, to the increase of banking, and the extension of the commerce and wealth of the country, to an almost unlimited degree.

Most persons imagine that the currency would be limited to an exceedingly small and insufficient amount if bank notes and discounts on credit were abolished; they may probably be surprised to learn that this view of the matter is merely imaginary. Nothing can be more certain than the fact that the currency, as well as the wealth of the country, would be increased by retaining the coin which, by the adulteration of the currency with paper, is cheapened below the value of other property, and below its value to every people and nation with whom it has more use; and is thereby forced abroad.

I therefore propose to the banks to abandon the theory that debt is money, which is false and pernicious—return to first principles, and change the system of banking from depending upon the mere expansion of debt—which must always go on increasing, by reason of the competition of the banks for dividends, expelling the coin from the country, until checked by the pressure for specie caused by the excess of the export over the receipts—to the normal and just principle of borrowing at a low rate of interest, and lending at a higher; dealing plainly in real money capital, and not in the capital of debt, and charging a proper commission on accounts according to service rendered.

There cannot be any paper money kept in circulation, or any other kind of demand liabilities used as money, beyond the amount of coin that would otherwise constitute the money of the country; they must displace the coin to find room in the currency. Of course they must first be created, and there will be a temporary excess, but as soon as they are incorporated in the currency they become merged in price: money is thereby reduced in value, which is only another mode of saying that commodities rise, and the coin being, by reason of the convertibility of the bank note, of no more market value than the paper, is immediately taken up by our foreign trade and leaves the country. Thus it is, that an almost constant current of specie has been flowing from the United States to Europe, as fast as it could be gathered, from the beginning of the present century, leaving the unhappy element of debt to discharge the office of real money; the "promise to pay" being fixed in the bond in the legal tender of gold and silver, while the Atlantic Ocean rolls between the debtors and their means of fulfilling their promises.

From the period of the evaporation of the continental money, 1780-81, for fifteen or twenty years, till the banks had become somewhat numerous, there was an abundant supply of coin in this country for all the purposes of business and government expenditure, although the Revolutionary War continued during the earlier years of this period; indeed, the war itself brought coin into the country from France, for the payment of the French contingent of our army, and from England, for the payment of the army of the enemy. The country would have retained this coin, if it could have found use in the currency to give it value, but the Bank of North America began to substitute its debt for real money in 1784, and other banks followed, till the medium of paper money cheapened all the money in the currency—paper and coin being made of like value by the convertibility of the paper—and forced the coin away, leaving only the minimum necessary to keep the paper convertible. Specie is legislated out of the country by State banking, the national government, for ten years past, having done all in its power to counteract the State legislation and keep it at home.

A simple illustration will show the mode of operation by which the paper money drives the coin out of the country.

The weight of the eagle is 258 grains, 9-10ths fine; it contains, therefore, 232 2-10ths grains of pure gold: the pure gold constitutes its whole exchangeable power—the alloy is reckoned of no value. This coin determines the price of gold, both coin and bullion, to be $18.60 per ounce, of standard fineness, which cannot change without an alteration of the mint law relating to it.

Gold is a commodity liable to fluctuation in value, by demand and supply precisely like iron, hemp, corn or any other commodity; and the present increased supply, without any corresponding increase of other property in the world, is now reducing its value with unprecedented rapidity. I request the reader to fix in his mind the broad distinction between value and price, for as I have said, and it must be obvious to everyone, the price of gold can only be changed by law.

Suppose we possess

1 ounce of standard gold, $18.60
3 bbls. flour, $6.20, 18.60
3 cwt. potash, $6.20, 18.60

and we will assume these values to be equivalent to the foreigner and ourselves. He wants flour and potash—the gold will not satisfy his want—it will, however, exchange for commodities that will satisfy every material want, but if he takes it he can only exchange it at the ports of the Black Sea, or elsewhere, for the flour and potash, an unnecessary operation which he has no occasion to make, if they are as cheap here as the gold. He will take the flour and potash, and leave the gold, of course. But let us now increase our currency five per cent, by the fabrication of paper money, without a corresponding increase of the flour and potash, the demand for those articles remaining as before, and there will be a relative depreciation in the value of the gold; but as its price is fixed in the currency at $18.60 per ounce, and therefore cannot change, how will its depreciation become apparent? Clearly by the rise of 5 per cent in the flour and potash, and the market will stand thus:

1 oz. standard gold, $18.60
3 bbls. flour, $6.51, 19.53
3 cwt. potash, $6.51, 19.53

Now it is plain that the gold is the cheapest commodity; the foreigner will surely take it, and buy the flour and potash elsewhere. He would do this if the difference were only one per cent, or any appreciable amount; consequently it is not possible to add to the currency, permanently, any amount of paper money whatever; we can only displace specie by substituting the paper. It will be obvious to the reader that we have only to go through the same ciphering with the flour—increase its supply five per cent—the gold and potash remaining as before in supply and demand—and we reduce the flour from $6.51 to $6.20 per barrel, and make the three barrels of flour equivalent to the ounce of gold again. The law is uniform among all the commodities of commerce; money forms no exception whatever. If we make money cheap, by increasing the dollars, we must inevitably give more of them in exchange for other property. A continual deviation in supply and demand is taking place among all the productions of labor, and relative changes in price and value are consequently occurring. These changes are not observed, in coin or money, by the casual thinker, because its price is fixed: difference between price and value he does not know, but its value is as fluctuating as that of other commodities. When the bank loans are high, money is cheap, that is, it requires more money to purchase a given amount of any other property; the increase of prices in this case is nothing more nor less than depreciation in the value of money—the rate of interest has nothing to do with it. Money, then, is sure to be exported, as being cheaper to the foreigner than our merchandise. He sells us his silk, or sugar, or broadcloth, for the mixed currency, at the inflated price which the mixed currency produces, but he takes none of the mixture in return; it is all convertible, unless the banks break, and he converts it, and takes the standard gold. We buy at the inflated price and pay in solid value.

This is a momentous consideration, to which I ask the attention of practical bankers. I believe we obtain no equivalent whatever for the coin and bullion thus exported; it is all paid in price over and beyond the true value. It would be better for us to add metallic alloy to the coin to the same extent that we now add paper money to the currency. Suppose the depreciation, by this paper alloy, to amount to five per cent on our whole currency of $600,000,000—I think it amounts to that in the average, sometimes being considerably more, as when the bank loans have been running up till we are bleeding freely in coin, at other times less, as when, at the close of every reaction, the export of specie is stopped by the enhanced value of money, when the sum of the currency is less than it would be in coin alone—then if we should add five per cent of metallic alloy to the coin, our eagle would be reduced in value to $9.50, but the price, $10, would remain the same as now, and as the alloy would permeate the other metal of the coin, the foreigner, who sells us his commodity for $10, would take the mixed article and get but $9.50 of value in return. If he could not afford to do this, he would not send his commodity here, and the imports would be checked. Now we alloy our money with paper, laid up with gold, but not combined with it, and the foreigner immediately separates the one from the other, leaving the worthless part—the paper—with us, and takes the standard gold.

It is wholly immaterial whether we add paper or copper, and make the debased money into two or a hundred eagles; the whole of them will possess no more value, and will buy no more than the one, and will move no more property, although the name of the property in dollars, that is, the price, will be increased two or a hundredfold. The only power or value in the money, being in the pure gold or silver it contains, obviously we can add nothing but pure gold or silver to the currency to give it any power or value whatever. By failing to understand this, we are losing $30,000,000 annually, in our method of paying for imports, and might as well plunge that sum of coin into the sea. In a series of years, we have, in my opinion, lost $355,000,000 in this manner, and we are now borrowing it back from England, for railroads, State debts and various enterprises, and paying interest on capital of our own creation. It is the bank debt in our own currency for which the coin has been expelled; the sum of that debt being $415,000,000, against which the banks hold $60,000,000 of coin in their coffers.

But this involves a still more important consideration; the productive industry of the country has been limited to the same extent. If we had retained the coin, we should unquestionably have exported other produce, and employed labor to the additional amount of $355,000,000. Buying specie is simply buying goods for cash, the best as well as the most agreeable traffic in the world, and retaining and using the coin in the currency secures the same result. No doctrine in political economy is better established than that which teaches that paper money cannot be retained in the currency in excess of the coin that would circulate without it. Adam Smith states this with perfect clearness. This reduces the matter to a very simple proportion. We have the $355,000,000 of bank debt in the currency, and we have not the coin, in consequence of the debt. What, then, have we to do? I answer, give value to specie by using it. Make it our currency exclusively, and we shall inevitably sell produce or manufactures for the whole sum of the precious metals resubstituted for the paper money. Our true policy is to make money worth more than merchandise. The solid capital thus obtained would possess a self-creative power that would increase the wealth of the country beyond the most sanguine anticipations; $355,000,000 of debt, which is the prolific source of misery and bankruptcy, would be extinguished; many a heartache would be relieved, and many a heartbreak would be prevented, and the rate of interest would fall to the lowest point known in any country on the globe. The capitalist would be no loser by this, for his securities would be improved more than his interest account would be reduced. Doubtless the ratio of failure to success would be reversed, and ninety-seven would succeed for every three who failed or died in poverty.

We have a pregnant illustration of the excellence of this natural system of currency in the unqualified success of the constitutional treasury. Political blindness prevented many of our experienced merchants and bankers from seeing, in advance, any merit in this measure. Mr. Abbot Lawrence, whose practical mercantile ability cannot be questioned, recorded his opinion upon the subject, in letters to Mr. Rives, of Virginia, in which he stated that the transactions of government would employ and absorb so large a proportion of the coin that the subtreasury would break every bank in the United States; but they did not break, and Mr. Lawrence could see no reason why they did not, but in the extraordinary demand for our breadstuffs, created by the famine in Ireland, in 1847. He did not see that an extraordinary demand for our produce or manufactures must always take place whenever we require specie, and make it more valuable than merchandise by use, which gives value to everything. The nation obtained the specie from Europe, by selling produce, three years before the gold of California came into commerce, and the government retains it in the country only by compelling the sale of produce instead of the coin; in other words, by using the coin instead of the circulating debt. Can anything be plainer and more certain than the power and utility of this in promoting the prosperity of the country? It is equally certain that the same plan would operate to the same advantage in our commercial finance.

Every intelligent observer could have foreseen, by the course of the New York banks, from the beginning of the present year, the outpouring of specie that has taken place; and particularly in their sudden increase of loans from May to August, the rapid expulsion of gold and silver from August to November. The banks made money cheap by its increase, and merchandise dear, which is the same thing in other words. Gold, therefore, went abroad, where it was worth more than here, and by the same rule merchandise came here, where it was worth more than abroad. The constant increase of banking capital in New York and in other States renders it certain that the same policy is to be continued to the utmost stretch of our specie strength.

The relative condition of the commercial finances of France and the United States affords an excellent lesson on this subject.[1]

The coin in France is estimated by J. Stuart Mill at £ 120,000,000, nearly $600,000,000, about the year 1844. I estimate it at this time to be $800,000,000
Circulation and deposits of the Bank of France $157,860,000
Deduct coin in do 31,747,000


Total currency of France $926,113,000

Currency of the United States, according to the last general returns:

Whole amount of coin in the country $250,000,000
Bank circulation and deposits $415,000,000
Deduct coin in the banks 60,000,000


Total currency of the United States $605,000,000

Although the specie of the Bank of France is in the ratio of $20 to $100 of immediate liabilities, while that of our banks is $14.50 to $100 only, yet the Bank of France is pressed, almost to the suspension of specie payments, because her notes and deposits, being due to large operators, such as the speculators involved in the bonds and concerns of the Credit Mobilier, are, from the necessities of her creditors, pressing upon her for payment in coin; while the reciprocal debt to and from the banks here is widely extended, and involves all classes alike. There is no failing in France, because the mass of the traders and people are well supplied with coin, and therefore are not involved in debt. Here there is continual failing, and failures are just now on the increase, as the increasing bankrupt list of the New York Independent shows, because our people and traders have almost no coin at all, are deeply in debt, and are called upon, by the exigencies of the banks, to pay, in specie value, obligations contracted at the inflated paper price.

A friend, an excellent authority, whose attention during a long life has been closely given to the subject of commercial finance, informs me that during his residence of fifteen years in Morlaix, a French town on the British channel, of 15,000 inhabitants, pursuing an active commerce with Spain, Portugal and South America, there occurred neither a failure nor a fire: the latter is an item in political economy of considerable importance that may be attributed to the absence of Young America, in which the French would seem to have greatly the advantage.

The statesmen of England understand the advantage possessed by the French in their currency. In the ministerial debate, concerning the embarrassments of the Bank of England, in 1825-6, Mr. Huskisson said, "If they wished to prove the value of a steady and unchangeable currency, they had it in the history of France; that country had been twice invaded by a foreign army, her capitol had been twice taken possession of, and she was obliged to pay large sums to foreign countries; but they had a steady metallic currency, and however such visitations might have affected the great—however the extensive contractor might have been injured or ruined—the body of the population remained unoppressed. The storm might have crushed the forest tree, but it passed over without injuring the humble reed. This was to be attributed to the permanent footing upon which the currency of that country had been established."

I make no doubt that such will be the result of the present financial crisis in France.

What if a war should be sprung upon us, by some of the untoward complications of our politics, as many politicians—less hopeful men than I—sometimes apprehend? What is the strength in the "sinews of war," of such a State as Massachusetts, for the struggle? The miserable pittance of $4,500,000 is all the real money there is in the State, both in the coffers of the banks and in the pockets of the people—leaving the United States subtreasury out of the estimate. Two or three rich men in Boston, if they chose to realize their property in money, could put all this coin in their pockets at once, and either of them, if he should happen to be disaffected to the public cause, could break every bank in the State with very little preparation. And this is one of the wealthiest and most enterprising States in the Union, entitled to at least $50,000,000 of coin in proportion to her present wealth, currency and commerce, which she might have, in two years of peace, without inconvenience to anybody, by withdrawing the paper currency, increasing and selling her manufactures, growing rich all the time, making her banking business of a legitimate character, and adding to its amount by the increase of real money.

It is time for us to look more deeply into this matter. Now, while a torrent of the precious metals is pouring into our lap, inviting use that would remove the incubus of debt under which the people have groaned and suffered for more than half a century, is it not blind infatuation to pursue a policy which scarcely permits the gold to kiss the shore on our side of the Atlantic? Europe, by pursuing the same folly, only in a less degree, is now driving the precious metals through the Red Sea to Asia, whence there is never a return. We need to feed that current only so long as our banks remain blind to their own and the nation's interest. If one of them would begin and withdraw its circulation, and pay and require payment in specie, the beneficial effect of the measure would soon become apparent. Certificates of deposit, issued against coin, can be used, if people must have paper for the convenience of portableness, the coin in all cases being retained to meet their return; but the point we must reach is this: The bank deposits and outstanding certificates payable must amount to the specie in the country, less the sum in the hands of the people, and no more. Pursuing the true and honest plan of lending money only when they have money to lend, the banks could reach this point, in my opinion, with profit to themselves, great relief to the people, and immense benefit to the whole country. They would become custodiers of the increased money, which would again increase of its own power, and relieve both banks and customers from the continual and complicated disasters of bankruptcy which must always settle the sum of every bank contraction.

This plan would insure the sale for cash of $355,000,000 of produce and manufactures in a very few years—in addition to our present commerce—give increased employment to our navigation, extinguish that sum of debt, reduce the rate of interest to three per cent or less, and secure the balance of trade in our favor with all the other nations of the world.

The wants of mankind are, and must continue to be, illimitable. Nobody, I believe, is fully satisfied with the most sumptuous belongings and indulgences; the luxuries of one age or generation become the necessaries of the next, and thus provision is constantly being made in advance for the employment of labor. There need be no fear that we can overstock the market of the world, with everything useful and ornamental, until plain mechanics are as well housed and furnished as the proud merchants, and merchants have attained the magnificence of princes, whom they emulate. The laboring classes are struggling upward, feeling destitute in the midst and in possession of what was abundance less than two centuries ago, and all have a wide margin of wants to be filled by their own labor.

We shall find a market for all we can produce; that certainly is secured by the law of progress which governs man's nature, and distinguishes him from the other animals of the earth. Let no one imagine that we shall find any difficulty in adding three or four hundred millions to our exports. So long as we buy we shall surely sell—the limit never will be reached. Unshackle the producers from the chain of debt that binds them now in the abnormal banking system, and the imagination cannot conceive the advance in material wealth that would be attained by this country in half a century of peace.

But the moral considerations involved in this question are still more important. Men are entangled in obligations by the expansion, and cornered by the contraction of the currency, and driven thereby to shifts and subterfuges that their souls abhor. Having once left the green fields of truth, and passed the border into the tangled and murky region of falsehood, they feel, like Macbeth, that "Returning were as tedious as go o'er." How many have been destroyed by this power of evil? How many are driven by perplexities thus produced to intemperance, despair and death? Worthy and sensitive men are the keenest sufferers in pecuniary adversity. Among many such whom I have known, I have in my mind one whom the money troubles of 1837 brought to a suspension of payment. He had been an indefatigable worker and a successful merchant. Ultimately he paid his debts in full, and came out of his embarrassments a wealthy man; but he never could get over the mortification of being a "broken merchant," and from the date of the disaster he was a "broken man." I knew another, not less worthy and industrious, always true and temperate to the last; he never failed, but the pressure of a contraction of the currency destroyed his debtors and his business. An old man, with a large and beautiful family depending upon his exertions, he fell into despair. I attended at his deathbed—the doctor did not understand his disease—I knew it well—it was a broken heart.

These are the considerations which move me to occupy your pages, and these are the evils that I believe the banks can remove. The institution or the individuals who shall reorganize the true and original system of currency, from which the country long since departed, and to which—thanks to Mr. Gouge—the government has returned, will, in my opinion, reap a rich reward in pecuniary gain, and ultimately in the approval and gratitude of the nation.

[1]Fullerton, a reliable authority, writing in 1844, quoted and commended by Mill, says: "In France, where the bank note circulation is still comparatively limited, the quantity of gold and silver coin in existence I find now correctly estimated, on what are described as the latest authorities, at the enormous sum of £120,000,000 sterling; nor is the estimate at all at variance with the reasonable probabilities of the case. Of this vast treasure there is every reason to presume that a very large proportion, probably by much the greater part, is absorbed in hoards." The great use of specie in that country, with the still limited bank note circulation, authorizes the conclusion that France has retained a large portion of the increased supply o£ gold since the discovery in California. I think it a very moderate estimate to put the sum of coin in that country, at this time, at $800,000,000. It is probably more.

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