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

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Chapter 31
The Currency Theories of the Day

(Reprinted from Bankers' Magazine and Statistical Register, XXV (May, 1871), 817-24.)

Mr. Walker contributes to Lippincott's Magazine of December last an article to show the damaging character of the legislation of Congress on the currency, during the session of 1869-70, as leading away from the assumption of specie payments, and tending altogether to expansion. I wish to add my testimony to the same effect. But, an objector may ask, "Why, then, is there no rise of general prices and the premium on gold?" The answer is that, so far, the expansion is absolute, not relative. Mr. Walker is dealing with the question in its absolute sense. Is there any more currency than before? Of this there can be no doubt. But, relatively, has the currency increased more than the capital of the country during the same time? Perhaps not. And if not, there can be no advance in gold nor in general prices.

Political economy has an unfortunate proclivity for metaphysics, and its literature is apt to run into vague theory and inconsequential discussion, incomprehensible to most men, and of no real importance when comprehended. Mr. Walker avoids this proclivity, partly as a judicious student of the science, but more, perhaps, because of his habits of thought and expression as a practical businessman. There is, however, a logical necessity, in all discussions of the currency question, for considering one element of complexity which he omits in the essay now under notice—namely, the activity of circulation.

Formerly it was supposed that the value of money was equal to the value of all the property it circulated; but this notion has long been exploded. Yet the truth is not generally seen that money, i.e., coined and unwrought gold and silver, is but a simple commodity, a thing that is bought and sold for what it is worth in other things, having its value, like every other commodity, in cost and supply and demand, as both an object and an instrument of exchange. Its value, therefore, is variable, and is measured by each thing against which it exchanges precisely on the principle of barter. If you sell a barrel of flour for an ounce of gold, you buy an ounce of gold for a barrel of flour. The exchange is complete, value for value, and the money then passes to another. You sell your ounce of gold for a coat, or buy a coat for an ounce of gold; it is but an accident of language which determines the mode of expression, whether buying or selling; and you have made what may be called a triangular barter, having exchanged a barrel of flour for a coat by bartering with a third commodity—money. Other traders use the same money, which, so long as its value is not impaired nor its office usurped by an inferior currency, passes on and continues in market through an endless succession of exchanges.

It follows that the activity of the circulation of money must be as its quantity compared with the quantity of all other things of equivalent value offered for exchange. Perhaps this proposition may not be capable of a perfectly accurate estimate, but I think it is as 1 to 10, approximately, so that the average activity of the circulation of money is to other circulating capital as 10 to 1. Of course, the money will be unequally distributed; some will have much, and some will have little or none, and some, as bankers, may have their whole circulating capital in money.

It will be observed that this estimate co-ordinates or compares money only with finished commodities and capital in market. Other capital not prepared for market, including fixed capital, not immediately affecting the circulation or the value of money, probably amounts to as much more; in addition to which there is out of market about half the same value of unproductive wealth, in estates appropriated to enjoyment, dwelling-houses, furniture, horses, carriages, etc., etc., which are not capital. The whole wealth of the country may, therefore, be reckoned as naturally twenty-five times the value of its money; and so far as we permit debt in the currency, or tokens, to displace money, we have so much the less capital and wealth, and so much the less means of doing business. For neither debt nor credit is capital; the only power or use of credit is to borrow capital; and so far as we are deficient in money, as in any other commodity, we are deficient in capital for credit to borrow or use. So far we are poor and needlessly embarrassed.

But a currency of debt will extend and measure price like so much money; therefore, the aggregate price of our circulating capital will be ten times the sum of the currency, whatever may be its character, whether money or debt or the counterfeit of either.

The increase of wealth in this country, at present, seems to correspond with the increase of population, the ratio being very nearly 3½ per cent per annum. Were the currency money, exclusively, the total of national wealth in 1870 would have been twenty thousand millions of dollars in gold value, as nearly, perhaps, as an estimate can be made. Probably six hundred millions should be deducted from this for the displacement of gold and silver by a valueless currency; for there is no value in debt, the value it relates to being in the property bound to pay it. But, for the sake of simplicity in reckoning, we will assume an increase of 3½ per cent on $20,000,000,000 for the present year, which will be seven hundred millions, of which two-fifths or two hundred and eighty millions will be in market as circulating capital. This would draw to itself and maintain in circulation twenty-eight millions of dollars in money, i.e., gold and silver, and no more. Manifestly it will not maintain at par any greater addition to our paper currency.

Mr. Walker shows that the currency act of 1870 authorizes an increase of twenty-nine millions of bank notes over and above twenty-five millions of three per cent certificates held by the banks, which by the same act are to be withdrawn, and no check is placed upon the increase of their deposits by discounting. These deposits are formed, chiefly, by discounting the price of goods sold on credit into dollars that have no existence, and the notes are formed in the same way. Such dollars and such money are purely fictitious, but the notes and the deposits are the same in principle and effect, and it is unnecessary to make any distinction between them as currency.

Judging from past experience, the right to increase the bank notes twenty-nine millions over the reserves will carry with it, when exercised, an increase of the deposits to double the amount, say fifty-eight millions, under the continued suspension of specie payments. Hence an increase of eighty-seven millions may be expected from that act alone. Mr. Walker estimates it higher, because the bank reserves are at present in excess of the legal limitation, and he supposes the banks may surrender their three per cent certificates without reducing their demand liabilities. He is probably right in the possibility of the case; but in the reckoning I wish to give the government the benefit of its caution, such as it is, and suppose that the exchange of the certificates for greenbacks will withdraw from circulation, and place in the reserves, an amount of greenbacks equal to the certificates held by the banks. I am also disposed to give fair consideration to the prudence of the banks, since they may fail on greenbacks, by and by, as they have already failed on gold and silver; and they will be the more likely to do so in the end, inasmuch as the withdrawal of greenbacks is without any return of value or means of payment to the country; whereas, gold and silver can only be withdrawn, like other capital, by returning an equal value in something else. Value pays for value, it matters little whether in money or merchandise, since, as true equivalents, each may be exchanged for the other without difficulty. But the contraction of currency by an offset of one debt against another is no payment of value; it is annihilation.

From these considerations it follows that the provision for increasing the currency by what is called the currency act of 1870, to say nothing of the act for establishing coin banks, is as much as three years' accumulation of capital like the present year would maintain at par with gold. And there are two reasons why it has not already caused a rise of the premium on gold and of general prices; one is that the activity of circulation is checked by the already redundant currency, which so diminishes the value of gold, or, what is the same thing, so advances gold prices, that we can neither build ships, nor sail them, nor produce commodities for export, in competition with other nations. We cannot have an active commerce with such a currency, and a sluggish circulation is a fatal bar to an advance in the price of anything. And the second reason is a logical sequence of the first: the machinery of the new currency is not yet sufficiently in operation to counterbalance the power of the increase of capital in the country to the present time.

Then follows the enactment for coin banks—an unaccountable caprice of Congress. Neither Mr. Walker nor anyone else seems to know where or how the idea originated. If there can be any use or advantage in such banks, it must be exclusively enjoyed by their proprietors to the damage of the public; since, so far as the interests or wants of the public are concerned, the business of supplying currency is greatly overdone. They may perhaps be able to convert into currency some portion of their credit, and of the price of government bonds, and thus, by adding to an already redundant currency, tax the people with interest for what is worse than nothing. But there seems to be no place for such institutions, which are coin banks only in name. Were they indeed coin banks, to borrow and lend capital in coin or bullion on time, never creating any demand liabilities without money, dollar for dollar, in reserve to meet them, they would promote the use and thereby tend to enhance the value of money, which is the true policy for the country: but they are nothing of the sort; they are to make their support and profit by lending their credit in making additional currency over and beyond any now existing, and, like all currency-making institutions, their profit must accrue, not in the legitimate difference of interest between borrowing and lending, but in the excess of their loans, on which they get interest without paying any, over their capital.

But the channel of currency is already so gorged with circulating credit that it is irredeemable, and the invariable rule is that the poorer currency, so long as the public accept it, will drive out the better. This coin bank currency of notes and "deposits" is, by the terms of the act, to be interchangeable with gold and silver coin. It is doubtful, I think, if the banks can circulate any of it, or do any business under the terms of their charters; because such currency would immediately depreciate the value of gold as if so much additional gold were thrown into market. In other words, it would raise the gold prices of goods, which would check the export of our domestic products, and bring in foreign goods at the advanced gold prices to take the gold. That is the inevitable effect of all credit or debt currency at its creation or expansion. While it is all alike, and interchangeable with gold, having the whole field to itself, it can be maintained, spasmodically, by expelling the surplus in bullion, by bankrupting individuals, and by occasional crises which break the banks that make it. The case is altered now; the whole field is preoccupied, and the channel of circulation is filled to overflowing with an inferior currency. If any of the anomalous "coin" currency presents itself in excess of the bullion held in reserve to meet it, the depreciation of gold will be immediate, and the excess will immediately be returned to the coin banks to be redeemed in gold for export. If I am mistaken in this. I shall be glad to make an apology for a mistake in science to the first coin bank that does a successful business.

To some points of Mr. Walker's essay I take exceptions. He thinks gold and the Treasury gold notes form a currency of "inflexible value." But there cannot be inflexible value in anything, since value is necessarily relative, and all things are continually changing in cost and supply and demand, in relation to each other. Money forms no exception to this rule. The only true idea of money is the simplest, viz., that it is a commodity, as I have said already, varying in value not only by reason of change in its own supply, but in the supply of everything which constitutes the demand for it; that is to say, everything and every service offering to be exchanged.

Mr. Walker is led into this error through the popular notion of a standard or measure of value which money is supposed to be, but is not. "Except," as Mr. De Quincey remarks, "when needed as a test of the variations between successive stages of a paper currency," a standard or measure of value is impossible; "not by accident impossible, but impossible by the very constitution of its idea"; because no object can be found to stand still when all other objects are moving, and thus be qualified to measure all changes of value between any two objects, showing how much of the change has belonged to the one, how much to the other, or whether either has been stationary: "no such qualification," says Mr. De Quincey, "can arise for any object—none can be privileged from change affecting itself; and if liable to change itself, we need not quote Aristotle's remark on the Lesbian rule to prove that it can never measure the changes in other objects."

But Mr. De Quincey's exception is significant. Money is a measure of value in the sense of limitation, as limiting the currency, and the price which springs from it, to value, because cost is an essential element of value. So long as the currency is money, and nothing else, price is money-value. Whereas the moment any portion of currency is added without the equivalent cost and value of money, that is, without the cost in labor and capital of gold and silver, price exceeds money-value, and is pure fiction; it is price without value, and of no more use than a fifth wheel to a coach.

I do not remember to have noticed this idea of a measure of value, as a test of the variations of a paper currency, in any writer but De Quincey. It is, however, essential to a comprehension of the nature of price, which, being mistaken for value, is the great delusion in the financial legislation of this country. The less price and the more value, the less currency as such, and the more capital we have in our national wealth, the more business we have, and the greater is our command of the commerce of the world; because the cheaper we produce and buy, and the dearer, relatively, we sell; in other words, the greater are our profits in foreign trade. What we need to do is to maintain the highest possible value of money, and that is its natural value, as capital. It is always in repletion naturally as currency, since that nation which has the least currency in relation to capital can produce cheaper than any other nation; hence there is no need of making currency, nor of extraordinary measures to encourage the importation of money, because cheap and desirable merchandise will attract it from every foreign market.

A peculiarity which influences Mr. Walker's view of a measure of value is that he considers price and value, under an exclusively metallic currency, to be synonymous. Were this so, then, of course, money, which is the true measure of price, would be also a true measure of value; but it is not so, because value is the power of purchase and payment in everything; whereas price is the same power in money only. Hence the value of a thing, or its general power of purchasing, may rise, while its price, or its power to purchase money, falls. This happens under a falling off in the supply of money, where, in a less degree, there is a falling off in the supply of the other article in question, or an extraordinary demand for it, other things being equal as before.

Thus, if we suppose money or bullion to be the only currency, and its quantity were diminished one-half in relation to circulating capital in general, it would follow that things which had before sold for one dollar would fall to fifty cents, on the average. Money, therefore, would have risen to double its former value. Meanwhile, wheat, and the other cereals, we may suppose had fallen off in supply one-fourth. Arithmetically, then, three-fourths of a bushel of wheat would be of the same value as a bushel had been before. In other words, it would have risen in value one-third, while it had fallen in price one-third. From one dollar it would fall to sixty-six and two-thirds cents the bushel, while it would exchange for one-third more of everything unaffected in supply and demand than it did before. This distinction between price and value Mr. Walker evidently has not settled in his mind.

But he is doing good service in opening a path for truth through the wilderness of error into which the subject of money and currency has been led by the example of the Bank of England and the teachings of Adam Smith. A certificate or note will serve the purpose of transferring the ownership of a commodity from one person to another, and it is a plausible but manifestly a shallow theory, on which the Bank of England is founded, that the certificate therefore answers all the purpose of the commodity itself, although in itself the certificate possesses no power of payment.

Commodities are things that are being constantly produced and bought and sold, in the employment of labor and capital; they are not consumed or enjoyed as commodities; the function of a commodity ceases when it passes out of market, and, while unconsumed, it is then simply wealth. In these respects money does not differ in the least degree from any other commodity. If we have it, it forms a portion of our capital and wealth; somebody has earned it and has it to sell or lend or enjoy. If we have it not, we are not in possession of so much capital and wealth; nobody has it to sell or lend or enjoy, and nothing produces nothing. Yet the Bank of England, and Adam Smith's theory of the economy of the precious metals, derived no doubt from the example of the Bank of England, are founded on the absurd notion that the certificate, without the money, answers every purpose of money; that the money can be sent abroad and exchanged for other capital, and the certificate, as a note or deposit, can be circulated in its place with a clear gain of so much capital. Whereas the truth is, the money is lost, not gained; it is lost by depreciation of the whole currency, dollar for dollar, as expansion proceeds in "paper money," the depreciation being developed in the rise of prices at which we buy foreign goods but cannot sell our own; and the gold and silver sent abroad to pay the advanced prices is the sum of the depreciation. It is utterly lost to us and gained by foreigners who produce and buy at the lower prices of a better currency; while we are floundering in debt and embarrassment caused by the absence of capital in money, with the consequent buying and selling on credit, and discounting evidences of debt, to form and maintain a currency of promises in its place.

There can be no objection to legitimate banking, nor to the use of credit in borrowing capital in goods or money, for that is the proper function of credit; but when it undertakes to convert the price of goods or securities into dollars of money, whether through government purchases or banking, where money is absent, it is a lie, and no credit at all, for such dollars are made of price, not value, and are pure fiction.

Bastiat, in his dialogue, What Is Money? makes one collocutor ask: "What harm is there in looking at cash as the sign of wealth?" The other replies: "The inconvenience is this—it leads to the idea that we have only to increase the sign to increase the things signified We go further. Just as in money we see the sign of wealth, we see also in paper money the sign of money, and thence conclude that there is a very easy and simple method of procuring for everybody the pleasures of fortune."

There is no end to the confusion which springs from the heresy that money is not wealth, but the sign of wealth, and that, being but a sign, it can itself be signified by promises to pay it, so that, by making promises to measure price as money, we can increase production and trade; as if the dry-goods dealers of the country could increase their business, ad libitum, by multiplying their yardsticks. Currency is the measure of price, and, as such, its increase is worse than useless; but money is wealth, the sign or representative of nothing but itself, and its increase is desirable, like other wealth, which declines in value until it is exportable in exchange for something more desirable because of higher value.

This is no theory; it is opposition to theory. It is no theory to insist upon the fact that gold and silver form the money of commerce here and everywhere; that our exchanges must be based upon it as the common equivalent of value at home and abroad; and that a promise to pay a thing cannot be the thing itself. It is no theory to justify and defend the normal use and value of money, but it is a theory that fiction in its place is a saving of money, as if poverty were a saving of wealth; and the burden of proof lies upon those who maintain it.

No business is more curtailed in amount and usefulness by the substitution theory than banking itself, because the loans of banks are constantly crippled by demand liabilities for money they never owned or borrowed, and which has no existence. Averaging the periods of expansion and contraction together, the loans of our currency banks do not exceed their capital more than two-thirds; while savings banks, having no capital at all, lend millions, each, in our large cities; and we have trust companies that lend twenty times the sum of their capital. The only difference in principle is that savings banks and trust companies borrow what they lend, and currency banks lend what they do not borrow. "Paper money" is not a significant term for the evil against which banking has to contend; it is the fictitious deposit—the so-called deposit, over and above any sum of money or of pre-existing currency, made by discounting an evidence of debt out of itself. Abolish this, and banking would doubtless extend itself and embrace nearly all the credit business of the country.

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