Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
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Chapter 30
The Financial Question
(Reprinted from
Hunt's Merchants' Magazine and Commercial Review, LXI (Dec, 1869),
420-28.)
What is repudiation? What is a dollar? What is money?
These specific inquiries embrace all that is essential in the great unsettled question
of our national finance. Let me endeavor to reply to them scientifically, uninfluenced
by political prejudice, or by the dogmatism of writers of any party, or of any shade
of opinion.
Repudiation is the denial of the validity of a contract, disavowal of an obligation,
and refusal to comply with its terms. On this point I think there can be no two
opinions. Now, what is the obligation of debt in this country? Read it on the back
of the greenback in your pocket: "This note is a legal tender for all debts, public
and private, except duties on imports and interest on the public debt." This is
equally plain on the back of the note, and in the law authorizing its issue. Nor
is there any question that a legal tender involves the compulsory acceptance, as
a dollar, of anything which Congress decrees to be a dollar, in discharge
of a debt, even if it be, as in the case of the greenback, but the evidence of another.
The substitution of debt for debt is not indeed payment; and the law, in saying
that the note of the government is payment, says an untruth; but it is
a "legal tender," and hence a forced loan.
It takes two to make a bargain; which of these is the repudiator in this case? Obviously
the creditor, when he refuses to accept the greenback according to the terms
of the contract; and the talk about repudiation, of which we hear so much in reference
to the 5-20 bonds, is all on the wrong side.
I do not see that the opinion of S. P. Chase, or of Jay Cooke, as to the character
of these bonds, is of any more consequence, or is any more binding on the conscience
or the capital of the nation, than the opinion of any other citizen who may or may
not have been concerned in their sale immediately.
Facts of experience show that, under the notions of political economy prevailing
everywhere, the sovereign can make a unit of price out of a bushel of beans, or
a red herring, or a paper token, or anything else, and both debtor and creditor
must be bound by it. To my mind it is false economy, as well as great folly and
injustice; but no opinion which favors a sound political economy is popular or considered
practical at present, because privileged classes of commanding influence are opposed
to it who gain by the wrong.
But an ex post facto law is a nullity. The Constitution of the United States expressly
declares that no such law shall be passed. Hence the greenback is not a legal tender
for any debt contracted prior to February 25, 1862, the date of the act which authorized
the issue of the legal tender notes.
What, then, is a dollar? It is a thing of law, and not of fact, independent of law.
Every government, I believe, makes the mistake of establishing arbitrarily a money
unit different from the unit of weight, claiming the right to alter it in weight
and quality at will. Formerly this was done notoriously to cheat the public creditors.
So that, everywhere, at least in Europe and America, law, and not commerce, determines
what the unit of price shall be, and even whether it shall be a ponderable substance,
and money, or not money. If government can change its substance, or alloy the coin
at will, 10 per cent, or 20 per cent, or 40 per cent, and still give it the same
name, and compel its acceptance at the same nominal value, why not alloy it 100
per cent, that is to say, eliminate the money, and establish a currency which is
not money? And this is precisely what our government has done in making a legal
tender of the greenback dollar.
I think government has a Constitutional right to do this by the power to borrow
money, which implies the choice to issue evidences of debt in any form that may
serve its purpose; also, by the power to regulate commerce and the currency, the
last being implied in the power to regulate the value of money: the moral right,
as well as its expediency, is quite another thing.
It is true the inference may be drawn from the inhibition of power to the States
to emit bills of credit, or make anything but gold and silver coin a tender in payment
of debts, that the framers of the Constitution intended to establish a hard-money
government; but this is only an inference. And, unfortunately for this view of the
case, the principle had lapsed already on the adoption of the Constitution; for
the Bank of North America had emitted bills of credit, as well as loaned its credit
in deposits, as money, without money, which had expelled so much money from the
country. So that a specie currency, with this principle in operation, was impossible
from the first.
The original dollar was coined in Bohemia of a troy ounce of silver, the fineness
of which I do not remember to have seen stated. This was superseded by the Spanish
dollar, weighing 416 grains of standard silver, about nine-tenths fine, and the
latter was adopted as the money unit here prior to the establishment of the mint.
The first American dollars were struck in 1792 to conform in weight and fineness
to this Spanish coin. The mint dollar afterwards underwent several alterations,
until 1853, when the coinage of the silver dollar ceased and the gold dollar became
the unit. This coin contains 25.8 troy grains of standard gold, nine-tenths fine.
The real gold dollar, therefore, is 23.22 troy grains of fine metal which is our
present money unit, by and upon which all our foreign exchanges are reckoned. But
our currency unit, for all purposes but the payment of duties on imports and interest
on the public debt, is the dollar greenback, which is essentially a paper token.
Thus we have two separate legal dollars, one of money and one of debt.
Since 1853 our silver dollar has been coined only in halves of 192 grains each,
making a reduction of about 8 per cent from the weight and value of the mint dollar
of 1792. But in Europe the variations of the dollar have been much greater than
in the United States, except that it is there always made of silver. In Germany,
its birthplace, where its original weight was an ounce, its contents in pure silver
vary in different localities from 252.6 to 271.8 grains, the standard metal being
alloyed variously, so that by our gold standard it is valued at 70 to 75 cents.
In Prussia the thaler, or dollar, of full weight contains 342 ½ grains
of standard silver, alloyed 25 per cent. In Italy the tallero, the Italian
dollar, weighed 454 grains, and was alloyed 40 per cent. I believe this coin, like
the old Spanish dollar, is out of circulation. Enough is here presented to show
that the dollar is a creature of government and not of commerce; that it is subject
to the most arbitrary alterations by princes and legislators who are wholly ignorant
of the effect of their measures, ignorant of the nature of money, of financial science
and of political economy altogether.
More obscurity in political economy, and more confusion to commerce, result from
the ignorance and folly of governments all over the world in separating the unit
of money from the unit of weight, and tampering with the money unit, under the notion
that they regulate commerce and the value of money thereby, than from all other
causes. Instead of regulation, every such act is disturbance; the only regulation
in the power of government being that of prevention, which shall prevent individuals
and corporations from disturbing the normal value of money with a false currency
in making credit in notes and deposits without value received and in counterfeiting.
Now let us consider what is money? Money is a matter of commerce independent of
government. It existed before government, and records of its use appear in the dawn
of history. It is a commodity which, before it was tampered with by princes to cheat
their creditors, circulated and was exchanged by the same unit of weight as other
ponderable substances. 1,860 years before Christ "Abraham weighed to Ephron four
hundred shekels of silver, current money with the merchant," in exchange for the
cave of Machpelah. The shekel was an ordinary Jewish weight equal to about half
an ounce avoirdupois, having no more relation to money than to any other commodity
that circulated by weight. Everyone knows that the British pound sterling contained
originally a pound weight of silver, and so did the French livre.
From the Conquest, A.D. 1066, to the 28th of Edward I, A.D. 1300, the pound weight
of silver was coined into the pound sterling, rather more than eleven-twelfths fine.
That is, the pound sterling contained 11 ounces and 2 dwts. of fine silver, and
22 dwts. of alloy. Under this king, in the latter year, the first depreciation appears
when the pound of silver was coined into £1 0s 3d; but in the reign of Edward III,
A.D. 1344 to 1356, the depreciation was extended to 20 per cent, the pound of silver
still of the same fineness, being coined into £1 5s, so that 25 shillings were degraded
to the original value of 20 shillings. Gradually, until the fifth of Edward VI,
a further depreciation took place when (A.D. 1551) it reached its climax, the fineness
of the silver being reduced to 3 ounces in the pound weight, and the debased metal
was coined into £3 12s. Both these measures of depreciation reduced the value of
the pound sterling eleven-twelfths from that of the original pound sterling or pound
of silver, leaving to the new coin of one pound but the original value of Is 8d.
It seems that the sum of £120,000 only was so coined, and in the same year the standard
was raised to 11 ounces of fine silver to the troy pound. This pound of standard
metal eleven-twelfths fine was then coined into £3. It is remarked in James' essays
that "the coinage of debased silver money in the fifth year of Edward VI of 3 oz.
fine ought more properly to be considered as tokens," which is very true, but it
should be understood that all coins are tokens and not money, so far as they consist
of base metal. The alloy is always reckoned of no value, and as that which is of
no value will purchase nothing, and make no payment, the alloy in coin is not money,
since money is a universal purchasing and paying power.
During all these years, from the Conquest, or at least from the reign of Edward
I, the notion prevailed that the will of the sovereign determined what should be
money, and what should be the value of money, by the name of the unit. Calling a
thing a pound sterling by authority was supposed to secure a uniform value under
all its variations of weight and quality.
The world has pretty thoroughly outgrown this foolish notion, but not quite. There
are yet people in this country, of pretensions to scientific knowledge, who believe
that Congress can by enactment determine that anything which it chooses to call
"a dollar," to be paid and received as a dollar, shall have the value of a dollar
of gold coin containing 23.22 grains of fine metal, in which all the value of the
dollar lies. This nonsense comes of the absurd custom of making and continuing a
unit of money that is not a common and familiar unit of weight, like, for example
the troy or avoirdupois ounce or pound.
Here let me remark, episodically, that, if we in this country are to adopt the French
metrical system of weights and measures, as I trust and believe we shall at no distant
day, it is to be hoped that we shall have nothing to do with the franc as the unit
of money, but come at once to the gramme coined in gold, since the gramme is the
French unit of weight. The gramme equals 15 434/1000 English troy grains; hence, if
alloyed one-tenth, like the present Federal and French money, it would make a coin
equal to .59 83/100 of our present gold dollar or nearly sixty cents. To avoid the
inconvenience of having so small a coin solid, it should be made and expanded in
a ring. As in any absolute change of the unit, a fraction for reckoning, in the
translation from the old to the new currency, is unavoidable, we may as well have
one fraction as another; and the sooner we get rid of the corrupted, blinding, preposterous,
and unmeaning dollar the better, if we can have the plain unit of weight
in gold in its place.
To return now to our immediate inquiry: What is money? it is necessary to say that
in every alteration of the coinage of England, before the establishment of the Bank,
general prices rose and fell to a corresponding degree; rising with the depreciation,
and falling with the appreciation in quality of the unit, only excepting variations
arising from the difference in the quantity of other circulating capital, such as
the fullness or scarcity of crops and production generally. The alterations of the
coin in England have been great enough, as I have already shown, to mark this feature
distinctly: and the proof is plain that money is pure unwrought gold and silver,
and nothing else, differing from bullion only in the alloy or impurity of the metal,
which must be eliminated to determine the quantity of money it contains.
As has been remarked already, the world has pretty thoroughly outgrown the notion
that the fiat of the sovereign can determine the value of money by operating upon
the unit and debasing the coin; but it has only begun to see that the value of money
can be immediately and disastrously disturbed by abnormal banking, which operates
directly upon the currency, as well as by the paper issues of government. This is
an evil infinitely worse than debasing the coin directly, because it amounts to
a debasement of the coin in effect, and a loss of capital into the bargain.
By debasing the coin directly, government gets the advantage, as a debtor, for the
difference between the new and the old unit, by paying a less quantity of money
than its debt was contracted in, and it gives to every other debtor the same unjust
advantage over his creditor. But here the mischief ends; no loss of national capital
results therefrom because the foreigner, who sells goods to us, must accept the
debased coin which he can exchange only for its true equivalent in the less quantity
of gold or merchandise for export. Whereas, when debt is converted into currency,
either of notes or deposits, the sum thus added to the previous currency is as complete
a debasement of its value as would be the addition of a like proportion of base
metal to the coin. The foreigner accepts the debased currency for his goods, and
immediately exchanges it for gold at par for its full amount, through the convertibility
of the bank notes and deposits, and the loss by the debasement is thrown wholly
upon ourselves.
I am indebted to no authority for this doctrine; it is self-evident in my opinion.
Through some leading mind it will some day enlighten Congress and make an end of
"paper money" in this country. Long after I had presented it in this magazine I
discovered that it was maintained by Adam Smith, although in direct contradiction
of the "paper money" theory which he seems to have contrived as an apologist of
the system of the Bank of England. In the Wealth of Nations, Book 4, Chapter
5, on Bounties, he says:—
That degradation in the value of silver, which is the effect of the fertility of
the mines, and which operates equally, or very nearly equally, through the greater
part of the commercial world, is a matter of very little consequence to any particular
country
But that degradation in the value of silver, which, being the effect either of the
peculiar situation, or of the political institutions of a particular country, takes
place only in that country, is a matter of very great consequence, which, far from
tending to make anybody really richer, tends to make everybody really poorer. The
rise in the money price of all commodities, which is in this case peculiar to that
country, tends to discourage more or less every sort of industry which is carried
on within it, and to enable foreign nations, by furnishing almost all sorts of goods
for a smaller quantity of silver than its own workmen can afford to do, to undersell
them, not only in the foreign, but even in the home market.
This is directly in conflict with the teaching in other parts of his book, that
"paper money" can be made to economize the precious metals through the operations
of banking, since the paper or bank credit, on its introduction or its increase,
must be an addition to, and a consequent local degradation of, the value of the
pre-existing currency, including silver, of course. The Wealth of Nations
is made up of disconnected lectures; the author seems to have altered his opinion
at times, and to have forgotten at one time what he said at another in relation
to money.
But an older and a better authority on this point than Adam Smith has recently been
brought to my notice by a controversy in the London Times. In 1757 Joseph
Harris, then master of the mint, wrote an Essay on Money and Coins, in
which my doctrine is set forth better, perhaps, than I can do it myself. McCulloch,
the economist, who procured the republication of this book by the Political Economy
Club in 1856, describes it "as one of the best and most valuable treatises that
has ever seen the light." Mr. Harris says:
Supposing the sum total of money, real and fictitious, now annually circulating
in this country, to be 100 millions; 20 millions of which is in cash, and the rest
in paper credit both public and private. If this paper credit be increased, by the
creating of more bills, suppose to the amount of ten millions; one of the following
will necessarily be the consequence: Either all our commodities will rise ten per
cent in their nominal value, which will render them too dear for foreign markets;
or this addition will drain away ten millions of our cash, and so impoverish us
in reality to that whole amount; or the effect most likely will be partly the one,
and partly the other; but whichever it is, the nation will be equally damaged. May
this be ever a caution to statesmen, how they listen to projects that must clog
our trade, banish our coin, and in the end bring on general bankruptcy.
Nothing can be plainer than this; but it is only a better utterance of the same
doctrine that I have held, and expressed in these pages, for many years.
Our true financial policy, then, is to abolish the fictitious money, or credit in
currency, altogether, and thus maintain the highest possible value of money, so
that we may produce and buy cheap and sell dear. Higher than the value of gold in
the markets of the world we cannot keep it if we would, because gold will accumulate,
both by production and import, the moment its purchasing and paying power is appreciably
greater here than elsewhere. Let us so regulate the value of money as to restore
it to its natural position as a commodity, and thereby so regulate commerce that
we may produce commodities more abundantly, as well as cheaper, build ships and
sail them cheaper, than the nations of Europe who use a paper or bank currency,
and thus we can easily take the lead of the commerce of the world.
As to the pretence that a bank currency payable in coin on demand, without coin
in reserve dollar for dollar to cover and pay it, can be limited to the natural
sum of money that would circulate without it, which is the theory of Adam Smith,
in which he contradicts himself, it is a proved impossibility. And, if it were not
an impossibility, it must always be an absence and a loss of capital, as the foregoing
illustration of Mr. Harris' demonstrates, and as I think I have demonstrated over
and over again in this magazine.
Of the 5-20 bonds I have already spoken. It is, I think, a quibble to deny that
they can be legally and justly discharged in greenbacks, but it would be madness
to do this by a new and further issue of greenbacks, since it would involve such
a degradation of their purchasing power, and consequent rise of prices, as would
eventually disgrace and sink them, and the national debt with them, in the hands
of their holders, after the manner of the French assignats. No such extreme depreciation
of currency will be long endured by an intelligent people. And the loss of the national
debt would thus fall almost entirely upon the working classes, who cannot afford
to be idle and reject the current circulation.
But if new gold bonds bearing a lower rate of interest, say 4 or 4½ per cent, can
be sold at par for the existing currency, as many persons suppose, then surely government
ought to accept the opportunity and retire the five-twenties. I confess to great
doubt on this point, because it is not a question of national credit, but of the
rent of capital in this country.
In England, where the proportion of capital to the demand for its use is greater
than here, and the currency is always better, because containing more of the element
of capital, and less of debt, 4 per cent annum offers a desirable investment, the
average rate there being 3 per cent. But here, where a vast extent of new, rich,
and cheap land in market, and vigorous young enterprise, with a currency of debt
built upon debt, are pressing upon a comparatively limited supply of capital, 6
or 7 per cent per annum is its needful rent on good securities. It is not easy,
therefore, to understand why anybody should lend us capital at 4 or 4½ per cent,
even on government bonds. Should Congress try the experiment, and succeed, I shall
be very glad to admit that my political economy is so far at fault.
Loanable capital is chiefly home-staying, consisting of goods sold on short credit,
the value of which the owners cannot well part with for long periods, and of money
which does not run abroad to a higher rent of capital, because its rent is high
only where it is scarce, and where capital in general is scarce it is of course
dear in exchange value, which is the same thing as saying that money is cheap; that
is, goods command high prices. Money does not go or stay where it is cheap any more
than other capital. Hence capital in goods runs to California, but money runs the
other way, although the rent of capital, or rate of interest, in California is from
18 to 24 per cent per annum on good securities.
We are always sure of having all the foreign capital in goods that we can consume
in this country, because our financial system which makes money cheap makes goods
dear. The capitalists who take and hold foreign loans in Europe pay the shippers
of goods that are sold to us; but in every country such men are but a small minority
of the people, and they hold or own, comparatively, but a small proportion of the
capital, most of it being actively employed at home.
However, if Congress will tax out of existence the fictitious bank currency of notes
and deposits, fund the greenbacks, and thus give to industry and commerce the opportunity
to add to the capital of the country a currency of money, which the people and the
banks can use in place of the present incubus of debt, the rent of capital, or rate
of interest, will fall materially, if not as low as it is in England. We can then
not only manage the national debt with ease, but, as I have already said, command
the commerce of the world.
These are my candid and carefully considered views of the financial question.
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