Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
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Chapter 36
Of the True and False in Money and Banking
(Reprinted from
Bankers' Magazine and Statistical Register, XXXIII (Jan., 1879),
509-12.)
Two elements determine the value of money, as the true measure of price; one is
the volume of currency, estimated in gold, in relation to the quantity of circulating
capital; the other is the rapidity of circulation. Obviously, if money does not
circulate, it has no effect upon prices; and it has more or less effect as the circulation
is more or less rapid. To the average trader it is all the same whether he receives
twice as much money for his sales in a given time because the volume of currency
is doubled, or because the rapidity of its circulation is doubled. He has no occasion
to know why the money comes; all he cares to know is that he gets it. Keeping a
certain quantity of goods on hand all the time, by buying and selling, he will discover
the varying proportion of his money to his goods and raise his prices the same in
the one case as in the other. On the other hand, he will reduce his prices the same
when he finds but half as much money offered, whether because of a contraction of
the currency or because of a contraction of its circulation.
The rapidity of circulation is a somewhat awkward phrase, but it is the best that
political economy affords to express the idea, and it is perfectly intelligible
to anyone who desires to understand it. It explains significantly the present condition
of money and trade. A contraction, not of the currency, but of the rapidity
of its circulation, has raised the value of money in the fall of prices almost to
the specie level; it has crippled trade, sunk assets, ruined debtors, destroyed
enterprises, thrown labor out of employment, and caused widespread misery in society.
But it is a cause within a cause; it is itself a consequence of inflation with false
money, and only the pain of getting sober after the pleasure of getting drunk. It
is but the revolt of commerce against the violation of its laws. Commerce requires
money, the commodity, the product of labor, as the equivalent of other commodities,
and we feed the money channel with debt, the equivalent of nothing, and the very
opposite of money. Commerce depends upon capital, and we expel capital to substitute
embarrassment, and force the exchanges of commodities through a ramification of
debt and credit as utterly needless as a fifth wheel to a coach. Were the currency
money, it would be borrowed, as capital, for trade as for any other enterprise,
legitimately when needed, and buying and selling would be for cash on delivery of
the goods, almost without exception. Ten thousand dollars thus borrowed and employed
would support a business of $100,000 a year in the sale of goods, on an average,
with ordinary enterprise and industry, and require no indebtedness beyond the $
10,000. Whereas the same amount of business, under our discount system of making
currency, requires the trader on borrowed capital to owe $50,000, and have $50,000
owing to him, besides his profits, which, if he makes any, are almost sure to be
unrealized for a long time among lagging and more or less doubtful receivable debts.
Moreover he will involve, and be involved with, his friends in the indorsement of
discounted paper for probably twenty or thirty thousand dollars on each side at
a moderate estimate. And the business of the country, in the aggregate, will be
so much the less as there is less capital to do it with in the absence of money.
Instead of permitting money to remain in the country, or flow in from other countries,
maintaining its normal value by noninterference, and exporting merchandise, we degrade
its value by interference, and export it under such degradation, by paying our own
false prices for foreign goods, in absolute loss. Instead of using it as the common
equivalent to buy and sell for cash, we entangle ourselves in debt, which, being
organized into currency by discounting, occupies and obstructs the money channel,
and drives the money out. And this we call the "Credit System." It is a miserable
fallacy; more properly, it is the counterfeit system. Money is the product of labor,
never of credit. Credit borrows capital legitimately, not by producing currency;
when it produces currency it produces false money and is but legalized counterfeiting.
Money is naturally in repletion; by no possibility can it be sent out or kept out
of the country, till it is in natural excess, but by adulterating it in the currency
with false money, so as to make it cheaper than merchandise.
The French economists and bankers understand this, and France has a paper currency
issued against, and covered with, specie, but no "paper money." Napoleon the First
understood it. On his return to Paris from Austerlitz, "he drove directly to the
Tuileries," says Abbot,
and ascended the stairs, with hasty strides, to his cabinet. Without undressing,
or even throwing himself upon a couch for a moment of repose, he sent for the Minister
of Finance. The whole of the remainder of the night was spent in a rigid examination
of the state of the Bank of France. The eagle eye of the Emperor immediately penetrated
the confusion in which its concerns were involved. Writing from the camp of Boulogne,
in the midst of all the distractions of the march to Ulm and Austerlitz, Napoleon
had thus addressed his Minister of Finance: "The paper of the bank is issued in
many, perhaps a majority of the cases, not on real capital, but on a delusive supposition
of wealth. In one word, in discounting in this manner the bank is coining false
money. So clearly do I see the danger of such a course, that, if necessary,
I would stop the pay of my soldiers rather than persevere in it."
The Bank of France no longer "coins false money"; it no longer discounts an evidence
of debt out of itself, and therefore does not increase the currency, the notes it
issues being merely instruments to circulate the pre-existing currency of specie
in its vaults, or credits and vouchers unused for money absolutely and honestly
borrowed and lent. It is immaterial whether a bank issues notes or inscribes credits
in its books for its demand debt. The notes are but items of an account current
in principle, the same as the book credits. Debit a bank to the value loaned on
its note when the same is received, and credit the bank by the value received when
the note is disposed of, and you demonstrate the principle of an account current;
but there is nothing of the nature of money in it. You simply lend to the bank for
nothing the value of the capital you dispose of for the note; it may be dry goods
or groceries or any sort of commodity or labor. The note has nothing to do with
money, it does not represent money, unless it is covered with money held in reserve
against it; in which case it serves as a certificate to circulate the ownership
of the money so held, as a storage certificate serves to circulate the ownership
of merchandise. If there is no money received and held, in the one case, or merchandise
in the other, the respective certificates or promises are equally false.
The French have a habit of hoarding, and they hoard bank notes as well as specie.
A commercial bank is not required or expected to cover its liabilities for borrowed
money with specie, any more than a savings bank. Such liabilities are not current
deposits; they are invested by their owners and earning interest; there is no principle
or effect of currency in them; of course, they do not affect the value of money
or general prices. But the deposits in daily use, offered in market as merchandise
in store is offered, and liable to be drawn upon as freely as the gold in one's
counting-house safe, are current deposits; they constitute, usually, the chief item
of running cash in the accounts of merchants and men of business; they are potentially
currency, and if they are not money actually in the bank vaults they are a swindle.
The true theory of such deposits is safekeeping; they are not lent to the bank nor
borrowed by it on any honest principle; and they cannot be lent by it without inflating
and debasing the currency, or, in the words of Napoleon, "coining false money."
This evil principle the Bank of France avoids, but the commercial banks of England,
and of Europe and America, in general, do not. Here in the United States it is the
one great temptation to the establishment of banks; it is the very principle on
which banking is supposed to depend for its profit and its existence, and, in the
long run, it is the ruin of the business. It is ignorantly and generally believed
here that without this paradox of holding while lending—having your cake and eating
it too, in the bank deposit—there would be no such business as banking. It is owing
to this principle that Germany has been financially ruined, almost, by receiving
the war indemnity of $1,100,000,000 which France paid without feeling it. Germany
used this money to increase the capital of her old banks, and more than double their
numbers in chartering new ones, and the false money they produced was used, as such
money always is used, in creating debt, and in promoting extravagant enterprises
and wild adventures, that have fallen to ruin. And England is suffering cruelly
from the operation of this principle to-day.
The Bank of France, including the branches, held on the 14th November, in coin and
bullion, $400,000,000; a sum undoubtedly exceeding its liabilities for the running
cash of its creditors, such being all that come within the category of currency.
Everything it owes, beyond this, is for capital borrowed in the pre-existing currency,
on the principle of a savings bank, to be loaned out without the ridiculous theory
of cash on hand to be checked upon at sight, when there is no such cash in existence.
Hence, as the bank does nothing to increase the currency, it does nothing to degrade
money and drive it away; so that France maintains a metallic system as pure as if
there were not a bank in the nation. No one estimates the specie in France at less
than $1,300,000,000; some place it as high as $1,600,000,000. She suffers more or
less, as every commercial nation must suffer, from the perturbations of commerce
and financial mismanagement elsewhere; but her trade is better conducted, more equal
and reliable, and less disturbed by defalcations and bankruptcies, than that of
any other nation outside of Asia. One would think, at times, that her bad politics
would ruin her; but her sound money system outlasts her kingdom, her rotten empire,
the crazy commune, and all the wild fancies of the most unpractical and fanatical
set of politicians that ever tampered with human government. To-day, if her government
should ask for a loan, the requirement would be promptly and far exceeded in offerings
of capital by her own people.
I commend to our banks, and our government, the example of the Bank of France, with
its devotion to the true principle of banking; in other words, refraining from the
making of false money.
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