Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
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Chapter 34
The Natural Sum of the Nation's Money
(Reprinted from
Bankers' Magazine and Statistical Register, XXXII (Dec, 1877),
449-56.)
There are merchants who say that, in buying goods with a bank note or check drawn
on a discount deposit, they do the same thing in principle as in buying on a banker's
letter of credit. They are mistaken. The difference between the two instruments
is world-wide; it is the difference between a lie and the truth. The bank note or
check is, of course, all right when used as an instrument to circulate the money
behind it; the money so circulated being the final recompense in exchange, and as
clearly the object of exchange as any other commodity can be. The money is a value,
the product of labor; the instrument is a nonvalue. There cannot be two
co-ordinate values embracing the same dollar; the same dollar cannot have two owners
and employers at one and the same time; and if the instrument circulates as money
without money behind it, i.e., as a title to money where there is no money, it is
virtually no better than a counterfeit note, which those who like it may circulate
as an instrument or a medium of exchange, for it pays nothing, it is no more of
a recompense than is the note of an individual given for a commodity purchased by
himself. An uncovered note of a bank or of the government, or an uncovered bank
check, is therefore plainly a falsehood in the cash account; it is a matter of credit,
an evidence of debt, under false pretenses and in the wrong place.
On the contrary, a banker's letter of credit is an honest paper—just what it pretends
to be, an instrument of credit, as innocent of injury to commerce, as free from
all power to degrade the value of money, or, what is the same thing, to raise prices,
as is a merchant's note or promise. It has nothing to do with the cash account.
Nobody pretends to consider it money.
The banker's credit may be better known than the merchant's, or it may be additional
security for a purchase, but in principle, and in its effect upon the market, the
simple honest credit of the banker does not differ from the simple honest credit
of the merchant. In either case the credit or promise is a postponement of the use
of money, and the effect upon the market, of more or less money, takes place at
the maturity of the promise, when the money is called for; if then there is not
money enough to go round, prices fall and accommodate themselves to the supply of
money in a natural and healthy manner. Or, if money is then abundant, and exceptionally
easy of attainment, prices rise, until, by attracting imports and checking exports
of merchandise, the rate of exchange is brought to par and the value of money to
an equilibrium with other markets.
Just here let me say that I am not unaware of the doctrine of John Stuart Mill as
to the influence of credit on prices, but I cannot accept it. Credit must flow in
the money channel and pass for "cash" to influence prices, for price means money
value, and when the price of a thing is not the equivalent of so much value in money,
but is raised by credit, it is false, and both an injury to commerce and a loss
of capital to the nation.
The course of exchange is the consequence and the criterion of the relative value
of money in different countries and cities. If, for example, it is distinctly, and
for a period of activity in commerce, against New York and in favor of London, it
is because money is cheaper in exchange value in this country than in England; in
other words, because general prices, reduced to weight for weight in gold, are higher
here than in England; and, if the difference is sufficient to cover the cost of
transporting specie, specie will be exported from New York to London, and merchandise
in return will be imported into this country from England, or from some other country
that will draw on this country for specie to be shipped to England. London being
the centre of the exchanges and clearinghouse of commercial nations, it
is sufficient for us to know that sterling exchange is effectually, not sporadically,
against us to know that we have more currency valued as money than our capital can
maintain in active circulation, and we must export the excess in specie. Conversely,
if the course of exchange is effectually in favor of this country, as it was in
1861, it is because money is worth more here than elsewhere; which means that we
have, as valued in gold, less currency in active circulation relatively to capital,
and consequently lower general prices, weight for weight in gold, than other countries.
We must import specie and export merchandise accordingly. There is nothing in all
this but the movement of a commodity cheaply transported, an object of exchange,
which goes where it is worth the most; that commodity being money—gold and silver
bullion—coveted the wide world over as the universal equivalent of value in exchange,
and therefore moving more promptly and with less change of value than any other
commodity. The "balance of trade" is, or ought to be, the balance of profits in
an excess of the value of imports over exports.
We may print or inscribe reams and tons of paper with promises, and circulate them
in notes or checks as money—they will only degrade the value of money and displace
so much capital in gold and silver bullion, without compensation, as they can be
converted into, beyond the natural volume of money; they will serve to transact
only so much the less business as there is the less capital to work with. As mediums
or instruments of exchange they will raise price without value,
and come at last to a valuation in gold for as much gold as can be had for them.
They must respond to the value of 23.22 grains troy weight of pure gold to the dollar,
though it may take a bushel of them to command a dollar of gold in exchange, or
they will not circulate.
Judge Kelly and his greenback disciples ought to know this from the colonial and
revolutionary history of this country; from the experience of France with John Law's
bank and Mississippi scheme, and afterwards with the assignats and mandats; from
the recent experience of the Confederate States, from the history of "paper money"
everywhere else, and finally from our own present experience. Judge Kelly ought
to know that the nation is without capital so far as it is without money, that is
to say, so far as government debt or any other debt takes the place of money, and
that we can no more escape a gold valuation by circulating greenbacks than he can
escape the atmospheric air by going to the clouds in a balloon. Commerce takes care
of this; it is not an affair of government. "Commerce is simply the exchange of
commodities"; this is a truism of political economy, and the absence of the commodity
money is so much abstracted from the means of doing business. No other commodity
increases business so much and so satisfactorily as money, for the reason that no
other commodity, as a commodity, that is, as a thing to buy and sell, is so universally
desired. And money, besides being a most valuable material of commerce, is its governor
and regulator, like the instrument which governs the movement of an engine by regulating
the supply of steam automatically as a part of the machine itself.
Here, as far as it goes, that is, omitting the resulting loss, is the true paper-money
doctrine laid down by the senior President Adams:
A certain sum of money is necessary to circulate among society, in order to carry
on their business. This precise sum is discoverable by calculation, and reducible
to certainty. You may emit paper money or any other currency, for this purpose,
until you reach this rule, and it will not depreciate. After you reach this rule
it will depreciate, and no power or act of legislation hitherto invented can prevent
it. In the case of paper, if you go on emitting forever, the whole mass will be
worth no more than that which was emitted within the rule.
During a long experience in business, and careful study of the money question, I
have been in the habit of estimating the currency in relation to population as the
only known quantity on which a calculation can be based. With singular uniformity,
before the financial operations for the war in 1861 threw all calculations into
confusion, I found $20 per head to be the turning point of the course of exchange;
hence, I came to the conclusion that the relations of capital and population were
such that $20 per capita was the extreme normal proportion of money, as the circulating
equivalent, to the capital of the country. But this was during a period of usual
and uniform increase of population. The following is the calculation of the currency
that I made nearest to January 1, 1861:
| Bank |
notes in circulation |
$202,005,767 |
|
| " |
current deposits, as reported |
257,229,562 |
|
| " |
balances due to banks |
61,275,256 |
|
| " |
current deposits in California, estimated |
8,663,922 |
|
|
|
|
$529,174,507 |
| Deduct |
|
|
| Specie in banks, as reported |
$87,674,507 |
|
| Specie reserve in California banks, estimated |
3,500,000 |
|
|
|
|
| Currency of bank debt, net |
|
$438,000,000 |
| Add |
|
|
| Specie in banks as above |
$91,174,507 |
|
| " hands of the people and in
the government Treasury, say |
108,825,493 |
|
| Currency of money |
|
200,000,000 |
| Counterfeit, probably |
|
2,000,000 |
|
|
|
| Total currency |
|
$640,000,000 |
Of the California currency there were no returns. Assuming the ratio of capital
to population to be the same in California as in the other States collectively,
her currency must have been in the same ratio, i.e., $20 per head. The large amounts
of bullion deposited in the banks of San Francisco, waiting distribution, not having
entered into circulation, cannot be reckoned as currency any more than the gold
and silver in the mines.
If the rate of increase of population from 1840 to 1860 had continued, the aggregate
population of the United States would be at the present time 48,000,000; but according
to the census of 1870, that rate—say 3½ per cent per annum—has not been maintained,
while it is obvious that the rate of increase of capital has advanced. Such vast
resources in abundant crops, mechanic and mining products, and circulating and fixed
capital of every sort, in relation to population, the nation never before possessed.
Capital being thus increased out of proportion to population, it follows that the
due proportion of money per capita must have advanced; how much is somewhat conjectural,
but if we assume the extreme number, 45,000,000 for population, and say, $22 2/9 per
head for money, we should have the sum of $1,000,000,000, which is the utmost weight
of gold and silver, in my opinion, that the capital of the nation can or could maintain,
if we had it, in an average activity of circulation. In dull times we could, perhaps,
hold more.
It must be understood that a dollar is a weight of metal, and, our standard being
gold, it is 25.8 grains, an unequal fraction of a troy ounce of gold nine-tenths
fine, or so much weight of silver as is equivalent in value to 25.8 grains of gold.
So far as silver is overvalued in coinage, it is a token currency and not money;
but silver bullion, coined or uncoined, is always money for its marketable worth
in pure gold, and gold bullion is always money for its marketable worth in pure
silver. A nation may choose its standard of gold or silver, and have its currency
of either metal, or of paper, but it cannot "demonetize" money. Hence I look upon
the words "demonetize" and "remonetize," so commonly used of late, as barbarisms.
Our population at the beginning of 1861 was 32,000,000, and the currency averaged
$20 per head. During the fiscal year ending June 30, 1860, the exchanges were generally
unfavorable, and the export of specie was larger than in any other year before or
since; but, late in 1860 and early in 1861, the commercial failures, anticipating
the rebellion, diminished the currency rapidly by largely annihilating bank deposits,
turned the course of exchange strongly in favor of the country, stimulated and maintained
a continued import of specie, until Secretary Chase's operations in demand notes,
and, with the banks, by discounting government bonds into supposititious dollars,
expanded the currency again, brought about an adverse course of exchange, and a
demand upon the banks to pay their imaginary dollars in money for export, which,
of course, they could not meet, and they stopped payment in December, 1861.
I estimate the currency now as follows, being careful to avoid duplicating in the
liabilities any portion of either item:
| Demand debt of the
National banks in notes, current deposits, and balances due to banks, net |
$850,000,000 |
| Demand debt of the
State banks in current deposits and balances, net |
150,000,000 |
| Government demand notes |
350,000,000 |
| Gold and silver coin and bullion |
150,000,000 |
|
|
| Total currency |
$1,500,000,000 |
The vast amount of indebtedness and the complication of embarrassment necessary
to make and maintain this currency, with the small proportion of money which is
the only regulator of exchange value, have so disorganized capital and demoralized
the exchanges that industry and trade have languished, and the currency has not
had an average activity of circulation. It is as if a considerable portion of it
were hoarded. General prices, therefore, do not correspond with the inflation; although
still too high, especially for provisions and many of the commonest necessaries
of life, they are not nearly so high as they would be if so much currency could
be brought into active circulation. But the currency would become surprisingly active
at once in a demand for money if gold could be had for the bank and government debt
in it at par, and money would pour out of the country under an adverse course of
exchange until another suspension, which would not be many weeks or days behind
the resumption.
I believe that $500,000,000 of this currency must be contracted before a paper currency
can be kept in circulation at par with gold; that is to say, the currency must be
diminished to the natural money volume, which I believe to be $1,000,000,000, unless
government chooses to tax out of existence the bank currency, prospectively, and
meantime maintain two separate currencies, one of paper and the other of gold and
silver, which in my opinion would be the best plan as well for the benefit of banking
as of all other business. Probably no business has suffered more of late, and is
still suffering, than banking. More than any other, that business requires the presence
and the regulating power of capital in money.
Resumption is not a question of the premium on gold, for that is merely the relation
between the real and the fictitious dollar, both of which are degraded by the "paper
money," but of the value of money in average prices. The value of money must rise
in a fall of prices to the level of the earlier part of the year 1861, and effectually
secure a favorable course of exchange, before a resumption of money payments can
be successfully accomplished.
Now it is being continually dinned into the public ear by un-practiced thinkers
on the subject, that specie payments are near in proportion to the reduction of
the premium on gold, and that resumption can only cause a fall of three per cent
in general prices, because three per cent happens to be the gold premium at the
present moment. This does not follow. The same mistake was made in England by the
economist Ricardo when resumption was under consideration there and the gold premium
had fallen to three per cent about the year 1817. Ricardo was then the most influential
adviser of the government and of the Bank of England. "Resumption," he said, "is
only a question of three per cent in the fall of prices"; but the fall was more
than thirty per cent, as is shown in lists and quotations of prices by Doubleday
in his Financial History of England;* and we must expect a similar fall
of prices to take place here from the same cause if we ever reach specie payments
again. It is because money is degraded below its normal value in high prices without regard
to the paper price of gold.
The so-called Restriction Act of Parliament, which was the legal authority for the
action of the bank, limited the period of suspension; but it had to be renewed and
extended over and over again until 1819, when Peel's bill granted four years for
resumption. Meanwhile the bank went on turning the screw of contraction, which had
already, from 1814, broken hundreds of country banks, until 1821, when, the gold
premium, which had ranged from 2¾ to five per cent for four years, being wiped out,
and the course of exchange effectually turned in favor of England, resumption was
accomplished without waiting for the maturity of the Act. The Restriction Act really
amounted to nothing in this case; it was like instructing or commanding a man to
die when his breath and brains were out. The bank paid specie as long as it could
till February, 1797, when that Act was passed, and it made the conditions by contraction
which enabled it to pay specie again in May, 1821.
So must it be here. The Resumption Act of 1875 amounts to nothing. The leading banks
of the three cities, Boston, New York, and Philadelphia, which chiefly caused the
suspension by discounting for Secretary Chase government bonds out of themselves
into one hundred and fifty millions of supposititious dollars in 1861, must make
the conditions for resumption by contraction, as they made the suspension, by expansion.
We must simply retrace our steps.
The greenbacks had nothing to do with the suspension; not a dollar of them was issued
till four months after that event, and their redemption and destruction now, if
practicable, would only
| These are the prices of Mark Lane and Smithfield: |
|
|
£ |
s. |
d. |
|
£ |
s. |
d. |
|
| Iron went down |
from |
12 |
10 |
0 |
to |
8 |
10 |
0 |
per ton. |
| Havana sugar |
" |
|
60 |
0 |
" |
|
42 |
0 |
per cwt. |
| Coffee |
" |
|
158 |
0 |
" |
|
110 |
0 |
" |
| East India Cotton |
" |
|
1 |
8 |
" |
|
|
9 |
per lb. |
| Tobacco |
" |
|
1 |
1 |
" |
|
|
7 |
" |
| Memel deals |
" |
22 |
|
|
" |
17 |
|
|
per load. |
cause the banks to fail for want of greenbacks
as they have already failed for want of gold and silver. The old demand notes of
the government for $50,000,000, issued in 1861, were the only element in the cause
of suspension except the bank debt; they are now out of the way, and the whole power
to bring about resumption lies in the strong creditor banks of the three cities
which hold a relation to the other banks of the United States similar to that of
the Bank of England to the other banks of the United Kingdom.
It is marvelous and unaccountable that the methods of science should be so utterly
neglected in the treatment of the money question as they are in the present financial
crisis. What is science but experience classified and recorded? We may know from
the experience of England what we must do to resume money payments, if we are to
maintain the English system of an uncovered currency of bank debt. Clearly it is
to offset the bank demand debt against the bank loans until the interchangeable
liabilities of the banks and the government with the coin and bullion in circulation
are contracted to the natural amount which we should have in real money without
any other currency. As I have said, I believe this amount to be approximately $1,000,000,000.
| *DOUBLEDAY'S LIST AND QUOTATIONS OF PRICES |
| Dates |
|
Wheat per quarter |
|
Mutton per stone, 8 lbs. |
|
Beef per stone, 8 lbs. |
|
|
|
s. |
|
|
s. |
d. |
|
s. |
d. |
|
s. |
d. |
|
s. |
d. |
| January, 1819 |
..... |
64 |
to |
82 |
..... |
5 |
0 |
to |
6 |
4 |
..... |
4 |
0 |
to |
5 |
0 |
| July, " |
..... |
58 |
" |
80 |
..... |
4 |
6 |
" |
5 |
2 |
..... |
4 |
6 |
" |
5 |
4 |
| January, 1820 |
..... |
54 |
" |
70 |
..... |
3 |
4 |
" |
4 |
4 |
..... |
3 |
4 |
" |
4 |
8 |
| January, 1821 |
..... |
40 |
" |
62 |
..... |
3 |
0 |
" |
4 |
0 |
..... |
3 |
2 |
" |
4 |
2 |
| July, 1821 |
..... |
36 |
" |
63 |
..... |
2 |
2 |
" |
3 |
4 |
..... |
2 |
8 |
" |
3 |
8 |
| January, 1822 |
..... |
30 |
" |
66 |
..... |
2 |
2 |
" |
3 |
2 |
..... |
2 |
0 |
" |
3 |
0 |
| July, 1822 |
..... |
30 |
" |
56 |
..... |
1 |
10 |
" |
2 |
6 |
..... |
2 |
0 |
" |
2 |
10 |
| January, 1823 |
..... |
30 |
" |
50 |
..... |
2 |
4 |
" |
3 |
0 |
..... |
2 |
4 |
" |
3 |
0 |
| July, " |
..... |
46 |
" |
67 |
..... |
2 |
8 |
" |
3 |
6 |
..... |
2 |
4 |
" |
3 |
0 |
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