Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
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Chapter 35
Of the Balance of Trade and the Course of Exchange
(Reprinted from
Bankers' Magazine and Statistical Register, XXXII (June, 1878),
949-54.)
The late William M. Gouge, one of the best political economists of the United States,
says, in his History of Banking, "Nothing is more certain than political
economy. Nothing is more uncertain than political arithmetic." Now the "balance
of trade," as it is understood in Washington, is a sort of political arithmetic
that is very unsound political economy. It is relied upon by our political leaders
in legislating for a resumption of specie payments; as if an excess in the value
of exports over imports is necessarily a balance of account returnable in money.
The doctrine of the "balance of trade" was exploded by Adam Smith a century ago,
and is emphatically contradicted by statistics—especially in England. In the Statistical
Abstract of the United Kingdom, copies of which are before me beginning
with 1854 and including 1875, there is not during the whole twenty-two years a single
year in which the imports do not exceed the exports of merchandise in money value
very largely. The returns for the three following years present, in Federal money
at $4 7/8 to the £ sterling, a fair average example of the whole period:
| Years |
|
Imports |
|
Exports |
|
Excess of Imports |
| 1854 |
..... |
$742,896,633 |
..... |
$564,627,823 |
..... |
$178,268,810 |
| 1858 |
..... |
802,346,181 |
..... |
681,441,048 |
..... |
120,905,133 |
| 1875 |
..... |
1,822,955,438 |
..... |
1,372,860,075 |
..... |
450,095,363 |
This exhibit, it will be observed, is of merchandise only. The imports of bullion
and specie were not registered at the British customhouse till the month of November,
1857; they exceeded the exports of the same every year from 1858 to 1875 inclusive,
with the exception of small balances in 1860, '61 and '72, the two former, '60 and
'61, being years of contraction of the currency here by the repudiation of Southern
debts, failures in business, and consequent annihilation of current bank deposits,
at the beginning of the rebellion. This contraction turned the course of exchange
effectively against England in favor of our loyal States. In the eighteen years,
'58 to 75 inclusive, the British imported $2,520,744,676, and exported $2,099,745,190,
of gold and silver, the excess of imports being $420,999,486, notwithstanding the
so-called adverse balance of trade every year of the whole series.
The imports of money exceeded the exports of the same $47,101,030 in 1858, and
$27,479,141 in 1875. Add these balances to the merchandise returns, and with such
figures before him, can an intelligent merchant say that the balance of trade is
against Great Britain? If I send out a foreign adventure costing $20,000, and get
as a final recompense $25,000 of money value in merchandise in return, I think the
balance of trade is $5,000 in my favor; if I get back but $15,000, I think the balance
of trade is $5,000 against me; and it is in favor of or against my country as it
is in favor of or against the merchants of the country altogether. The true balance
of trade, then, is a balance of profits.
Great Britain receives interest on her foreign loans in her imports; but that does
not begin to account for the great excess and continual increase in the value of
her imports over her exports. The truth is she maintains, under the screw of the
Bank of England, a better currency, i.e., less currency in proportion to capital,
than most of the commercial nations, and consequently a higher value of money, so
that she produces cheaply and sells steadily at a profit; but there is room for
improvement; the seesaw of her currency by the Bank of England, in fickle and fictitious
expansion by discount deposits, alternated by sharp contraction, is distressing;
we can do better if we will.
Because of her restricted territory England does not feed her own population, nor
supply nearly sufficient raw material for her manufactures, directly with her own
products; hence the preponderating volume of her foreign commerce. Obviously she
must import and export more than countries which utilize their own products more
directly and more extensively. The balance of trade, except as a balance of profits,
is a chimera; there are no figures to be found for it.
But the balance of exchange is another matter and a very simple one. It is the difference
in the exchange value or purchasing power of money in different cities and countries.
Of course, the exchange value of money is to be found in what money will fetch in
other things; that is to say, in general prices reduced to bullion value. If general
prices in real money are sufficiently high here and low elsewhere, it is clear that
we must buy goods and sell money. If such prices are sufficiently low here and high
elsewhere, it is equally clear that we must sell goods and buy money. We may make
high and false prices with false money in overvalued silver or in uncovered promises
of banks or government, convertible or otherwise; but foreign merchants will not
pay such prices for our commodities; they will sell us their commodities abundantly
at such prices; they will take here our overvalued currency of silver and paper,
but they will carry away specie at the bullion value for it; and, if we are so ignorant
of political economy as to make the spurious currency interchangeable with real
money by legislation, we lose the difference infallibly. Foreigners get the high
prices of our false money for their goods, but leave the dross with us, taking away
our good gold in exchange for base money at par. This is what Secretary Sherman
and his questioners of the Congressional Banking and Currency Committee ought to
know, but do not. Another thing they do not seem to know is that the current demand
deposits of banks form the chief part of the currency; the bank deposit being the
principal item in the running cash balance of every merchant and man of enterprise.
This is too plain a fact to admit of argument, yet it is constantly ignored in legislation
upon the currency.
I have now to say, if Mr. Sherman directs legislation, or takes his measures, after
his notion of the balance of trade, and expects to maintain specie payments by accumulating
a hundred or two millions more or less of coin, he will be cruelly disappointed
whenever business assumes an average degree of activity. Rapidity of circulation
is a prime element in the value of money—it raises prices. A rise of prices and
a fall in the value of money are one and the same thing, and any appreciable fall
in the value of money below its present level will send it out of the country rapidly
under an adverse course of exchange.
Money is simply a commodity when employed in commerce; that is to say, it is a material
value that is bought and sold, and, like every other commodity, as already demonstrated,
it will be exported when cheaper and imported when dearer at home than abroad. Every
bond we owe in Europe might be returned here for sale at once without causing the
export of a dime of specie, if we should maintain money at a higher value than merchandise,
as we can by suppressing the uncovered paper currency, including the fictitious
discount "deposits," the current uncovered inscribed credits of the banks. We should
necessarily export the more merchandise, and have more and a brisker business. We
have an abundance of capital for this purpose, but it is disorganized by a currency
which, to create and maintain it with false prices, involves in needless debt and
embarrassment almost every enterprising businessman in the nation. What we want
to obviate this difficulty is simply noninterference with the normal value and circulation
of money.
The currency now organized by the banks and the government, and waiting demand with
a crippled business, is more than the capital of the country can maintain in active
use. Including specie, the currency is, I think, some $500,000,000 beyond the natural
money volume with which capital can be circulated at its bullion price and value,
and an active, healthy, business conducted; it is so much more than can be maintained
under specie payment. Accumulating specie, therefore, is not the thing to do, especially
at the cost of interest by increasing or maintaining the bonded national debt. The
true policy is to reduce the paper currency, and the reduction should be of that
which costs interest, viz.:—the bank currency. Doubtless the banks would object
to this. I believe they would be benefited by it in the long run.
I have endeavored to show in previous contributions to the Banker's Magazine, that
the principle of discounting an evidence of debt out of itself, and lending credit
as money, is damaging to the business of banking in the end, as well as to all other
business. It is making false money, raising price without value, and imposing an
obligation upon the bank customer to return real money or value for it, which obligation,
multiplied by circulation, must end in bankruptcy somewhere, since there is no real
money or value created or existing to pay it with. Ultimately it reacts upon its
creator, the bank, and bankruptcy becomes, in specious phrase, "the suspension of
specie payments." The losses that are falling upon the banks at this time, and have
yet to be set off in their accounts between their loans and their liabilities, form
a practical illustration of this truth.
But I wish to repeat, what I have formerly said, that no one objects to the lending
of credit, as credit, by a bank any more than by a merchant. A merchant may buy
goods on his own credit, or on a letter of credit of a bank or banker, with no more
or different effect upon the market in the one case than in the other. In either
case the credit is not offered or mistaken for money; it enters into no cash account;
it is an honest, undisguised postponement of the use of money; it is lending credit
in borrowing capital without completing the exchange. What possible difference can
it make whether the credit so employed is that of the merchant or the banker? All
that is necessary for legitimate and useful banking in the case is, that the banker
shall pay his debt in money, like the merchant, when the use of money is required
to complete the exchange; that is, when payment is demanded, so that fictitious
dollars shall not be created in the transaction. The seller then recovers his capital
in a commodity that everybody wants—the most desirable commodity known to commerce.
It is therefore simple nonsense to prate of money as a mere medium of exchange,
the purpose of which may be served by an evidence of debt which pays nothing. Clearly
it is the object of exchange, in value as the common equivalent, which
constitutes the essence of money.
The question of profit to the banks is, whether they can make as much by lending
their credit as money, with their loans consequently crippled by current uncovered
demand liabilities, as they could make by borrowing and lending capital at a proper
difference of interest through the instrumentality of money, with no such demand
liabilities and all the loanable capital of the country to borrow from. The capacity
of the banks to lend does not depend upon their power to produce currency in notes
or current deposits, nor upon the quantity of currency or money in the country,
except so far as money is capital; it depends upon the quantity of loanable capital
at their command, for the same dollar of currency will serve to circulate in banking,
as in any other business, many times its amount of capital according to the activity
of circulation.
It is simply impossible to have too little currency, as such, and equally impossible
to have too much capital, including money, since the less currency we have in relation
to capital the higher is the value of our money, or, what is the same thing, the
lower are our general prices, so that we necessarily keep the course of exchange
in our favor, produce cheaper, attract more trade and sell at a greater profit than
nations having relatively more currency and less capital. It is not as currency,
therefore, but as capital that we gain by the increase of money, and the more circulating
capital of any sort, the wider is the field for banking. A sluggish commerce and
a steadily favorable course of exchange are incompatibilities; they cannot exist
together.
The returns at Washington show that the loans of the commercial banks, so long as
they maintain specie payments, do not exceed their capital more than about two-thirds
on the average, taking the years together. According to this an average bank of
$600,000 capital would lend $1,000,000, and probably in the Atlantic cities the
interest would average six per cent per annum, say $60,000 gross income for the
year. A bank that should make one per cent per annum on its loans by borrowing the
excess and lending ten times its capital of $600,000 would aggregate the same income
without inflating the currency or crippling its business or the business of the
country with fictitious money. Now there are trust companies in the Atlantic cities
lending twenty times their capital, and savings banks, with no stock capital, lending
twenty millions of dollars each; they are enabled to do this business because they
lend only what they own or borrow; they avoid the pernicious principle of lending
their credit as money; hence they do nothing to degrade the value of money or to
force it abroad.
There is no reason in the world that I can discover why commercial banking should
not be done upon this plain, honest principle, which would put an end to the ruinous
fluctuation of prices and the vast amount of needless bad debts that result from
the operations of the present system, and are as injurious to banking as to any
other business. I say, then, in view of the great losses they bring upon themselves
periodically with their fictitious money, I believe the banks would make greater
profits in the long run by abandoning the principle of discounting an evidence of
debt out of itself, which is the groundwork of false money in banking.
Goethe makes Mephistopheles say: "It is a law binding on devils and phantoms that
they must go out the same way they stole in." The phantom of "paper money" stole
in through legislation; it must go out through legislation, or it will ruin not
merely the dominant party but the politics, industry, commerce, and social order
of the country. The true policy, in my opinion, is to tax out of existence the uncovered
bank currency, prospectively, and then gradually retire the greenbacks, or cover
them with specie, so as to keep the foreign exchanges continually in our favor,
until, by exporting merchandise and importing money, in addition to the product
of our own mines, the money channel is filled with the solid capital in gold and
silver which belongs to it. This will, if adopted, set industry in motion, silence
the idle brawling of labor against capital, and the more reasonable and just complaints
against privileged legislation for the banks; it will cause the production and export
of merchandise, and the addition to our active circulating capital of some eight
hundred millions of dollars that we cannot have while the present paper blockade
is maintained; it will give an immediate start to shipbuilding, and ready employment
of navigation for the shipment of bulky cargoes abroad; it will give security to
property and contracts in the future, and success to the well-planned enterprises
of honest men; and it will dry up that fountain of needless debt which overwhelms
in bankruptcy some time in his life, or leaves in poverty at his death, nearly every
man who ventures into trade.
The key to this policy is to be found in the course of exchange; let us keep this
in our favor, by adherence to natural laws, and we command the commerce of the world
until we have, as capital in the product of labor, an excess of money when we shall
have a desirable commodity to dispose of profitably, like an excess of wheat or
cotton, instead of selling it for nothing under the degrading power of an overvalued
currency.
Whether we shall do well or ill in this matter depends chiefly, as we see, upon
the management of the banks either by themselves or by the government. A sluggish
and an obstructed circulation reduces prices, as if the currency were partially
hoarded, and accordingly raises the value of money; it may extinguish the gold premium
entirely and make a temporary show of specie payment, but that the export of money
can be checked for any considerable time, and specie payments maintained with the
demand liabilities of the banks and the government as they are now, or within several
hundred millions of their present amount, I conceive to be impossible.
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