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

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Chapter 6
Specie Prices and Results

(Reprinted from Hunt's Merchants' Magazine and Commercial Review, XXXVII (Oct., 1857), 429-34. This paper also appeared in The Canadian Merchants' Magazine, II (1857), 114-115. I am indebted to Dr. Crauford Goodwin for this information.)

Most persons, if asked what would be the effect upon prices, of a return to an exclusively metallic currency in this country, would say that they would fall enormously, perhaps seventy-five per cent or more; at least, this is the opinion commonly expressed by casual thinkers on the subject.

They have in view only the ratio of the specie to the debt of the banks, as exhibited in their returns. It might be well for those who think so, to consider how long anything moveable would remain in this country at one-fourth its present price, or how long the specie could be kept out that would be offered in exchange therefor. As we export about $275,000,000 of merchandise annually, at present, it would not seem to require a great fall of prices to increase the export of merchandise to equal the gold exported—$50,000,000 yearly, and keep the gold at home.

What are the banks in this connection? They create no real money, no gold or silver, nor anything that will procure them from abroad. They create no value, and add nothing to the demand for labor, or to the products or wealth of the community; but they create debt, inflate prices, furnish machinery for speculation, and expel gold from the country, to make room for their own debt, and gain interest thereon. They do not, and cannot, make any permanent addition to the currency.

It is marvelous what a perfect hallucination upon this subject possesses the minds of men otherwise thoroughly intelligent.The truth is, the fall of prices would be scarcely appreciable, at any time when gold is not being extensively shipped out of the country. If gold is not exported, it is for the same reason that prevents the export of any other commodity; because its value is as great here as abroad. It has no more reference to debt, or the balance of trade, in this connection, than beef or pork.

What regulates or determines the value of gold? Certainly nothing but the money price of commodities. An average rise of prices is a fall in the value of money. An average fall of prices is a rise in the value of money. And as gold is money, it varies in value accordingly, inversely as the prices of exchangeable things. A general rise of prices can be brought about only by a relative disproportion between money and all commodities; money must become relatively plenty, or commodities relatively and universally scarce. This latter condition is scarcely possible. The great changes in general prices are the result of changes in the supply of money, as it is thrown upon or withdrawn from the market, alternately.

To bring this matter within the comprehension of every reader who will give it a moment's reflection, let us assume some one commodity as the representative of all others; its money price representing the value of gold. We will take wheat, for example, at the average price of $1.50 per bushel, and suppose it will pay something to export at that, but nothing at any higher price. Then if it should become a little scarcer, and rise 2 per cent, gold would be cheaper than wheat, and instead of shipping a bushel of wheat at $1.50, the exporter will send $1.53 in gold, with which he will buy 2 per cent more wheat elsewhere. This would be owing to a rise in the value as well as in the price of wheat. But suppose, instead of wheat becoming scarcer, the same relative disproportion between wheat and gold should be caused by an increase of gold, precisely the same effect upon prices would be produced; wheat would rise from $1.50 to $1.53 per bushel. This would not be a rise in the value of wheat, but a fall in the value of gold.

I presume the reader will not need to be told that the dollars manufactured on bank books, and in paper notes, are just as available for purchases, and have the same effect upon prices, as those made of gold and silver. At any time, therefore, when $1.50 per bushel is the exporter's limit for the shipment of wheat, if we supply 2 per cent more of the fancy dollars than the currency contained before, the shipment of wheat stops, and the dollars go in its place; but not the fancy ones—they are made for the home market, where they must remain.

It will be observed that this advance of 2 per cent is an average rise of all commodities, in the degradation of gold. Of course, the imported commodity is advanced with the rest, and we pay the 2 per cent, which is the precise addition of the paper to the currency, and get nothing for it; that is, we pay $1.53 for an imported commodity, which was worth, in the previous condition of the currency, $1.50; the paper addition to the price, equal to 3 cents per bushel on the wheat, being wholly lost. And this is the only way in which paper money can be introduced. It must cost the country its whole sum in standard gold.

Obviously, this state of things could not continue, for if it did, our gold would run out, and the imports would run in, till the gold would be exhausted. The gold does run out, till the excess of money is reduced, and wheat falls to $1.50, when wheat can be exported again; but the gold is gone, and we have the fancy dollars permanently established in its place by a sheer usurpation.

The reader will not understand me to say that there is ever a period when the export trade is entirely suspended. Some or many commodities can always be exported to various markets. In taking wheat for an illustration, I wish merely to embody the change of price and value produced by an alteration of the proportions between money and commodities; the average alone must be considered in this illustration.

Nothing can be more certain than that any increase of currency here, in relation to commodities, beyond the same relation elsewhere, will make gold worth less here, in the same proportion, and send it abroad. A fall of one per cent in the value of gold must be measured and determined by a rise of one per cent in the average price of the commodities offered for sale. Commerce will discover this with infallible certainty and take the gold. An average fall of one cent, therefore, in the price of commodities, by a reduction of that proportion of the currency, sinks that difference, and keeps our gold at home.

And here I would remark, that this fall of prices of one per cent, or ten, or fifty per cent, or whatever it may be, is precisely made good to us in the enhanced value of money. If fifty cents will buy as much of all property as one dollar, the value is the same. The effort to supply the additional sum, without increasing commodities, defeats itself, by degrading the value, in proportion to the increase, of money.

It is wealth—capital—that we want, not money. The less money we have in relation to commodities, the better; the more active will be the business, and the greater the prosperity of the country. We produce exportable articles abundantly, and can produce an abundance more. It is utterly impossible for us to prevent the supply of real money if we use no other. The only method of making money scarce in this country is that which we adopt, of making debt plenty, by which money is made relatively scarce. Two-thirds of our currency is debt—a mad system of kiting between the banks and their customers—and an enormous superstructure of debt is built thereon, keeping almost every trader in danger of bankruptcy. There is nothing else the matter with the business of this country. We are the most productive people in the world, by reason of our intelligent industry and the comparative absence of war, army, navy, idle privileged classes, paupers, and unproductive consumers generally.

Cultivating the arts of peace, with an education almost wholly devoted to utilitarian purposes, while other nations are wasting their resources in war and frivolity, we are growing strong; but we are contributing to them, of our earnings, many millions of good gold, yearly, for which we get no return. We thrive by vigorous labor in spite of the wasteful currency—not by it.

We create more property than any other people, according to numbers, and that remains in houses, ships, cultivated lands, and various merchandise, through all the financial revulsions. Thus we present the anomaly of a nation of great wealth, with very little money included therein, much debt among ourselves, which includes two-thirds of what we call our money—vigorously prosperous as a unit, with a people individually more generally bankrupt, careworn, and distressed, than any other on the globe. This, of course, is more frequently the case with the manufacturers and traders than with farmers and mechanics. As to the traders, there are not five in a hundred, over 55 years of age, who have not been compelled to compound with their creditors once or more, or who can pay their debts at last. In distributing the wealth of the country, they come more immediately in contact with the banking system, and suffer the most accordingly.

It is slander to say that all this is the result of individual mismanagement of business; it is the fault of an abnormal system of finance. Bankruptcy in trade occurs in proportion to the extent of the debt banking system all over the world; it almost never happens in countries using only a specie currency. It has visibly diminished in New Orleans—formerly the most notorious place in the country for bad debts—since the passage of the restrictive banking law of Louisiana, suppressing bank notes below the denomination of $5, and requiring the banks to hold one-third the amount of their immediate liabilities in specie. New Orleans is now the safest of our Atlantic cities in regard to commercial obligations and has greatly the advantage of the others in the exchanges of trade. Seldom does the name of a New Orleans merchant appear in the published bankrupt list; and in the present financial epidemic, originating in the inflation of the New York banks, which distresses almost every other city, New Orleans remains unscathed.

With such experience to guide public opinion, it is unaccountably strange that the transparent evils of our banking system do not fix the attention of every intelligent person in the land. They could be easily remedied, with great gain to the country, and the remedy would impart immediate activity to trade.

If we should retain the annual supply of California gold—$50,000,000, and buy $50,000,000 more from Europe, what would it be but selling an additional $100,000,000 of merchandise for cash? Every trader is desirous to sell his goods for cash, but few are aware that the reason he cannot do this is that the cash is not here, because it has less utility and value in our commerce than in any other. The bank debt, that we use in its place, and call money, is mortgaged by a counter debt as soon as it is created, and remains mortgaged as long as it exists. It is debt issued, for debt received, and is in constant demand to discharge itself. There is none of it to spare for cash traffic in merchandise. Its only office is one of transfer; debt can never be reduced by that sort of money. As long as the community owes the bank, the bank must owe the community. Unfortunately, the contract on both sides is for planchets of gold that neither party ever possessed. It is precisely the cornering trick of the stock exchange, elaborated and extended over the whole country. When the shorts are called upon to deliver, the planchets are in Europe and Asia; they can only be obtained by a journey round the world, and in the struggle to obtain them, the means relied upon may probably collapse one-half. What then is to be done? We are skilled by extensive practice in this emergency. Settle the difference in bankruptcy!

Now, I ask the reader to consider well the vast importance of this subject. The banks of the United States owe, in circulation and inscriptions of credit, about $400,000,000, over and above the coin they hold in reserve, and there remains $200,000,000 of coin in the whole country, including the amount in the banks, the government treasury, and the pockets of the people. That portion of this whole sum—$600,000,000—which is not hoarded, that is, which is being offered for the purchase of property, measures and determines the price of all the property of this country.

The debt portion—$400,000,000—of this currency usurps the place of the same sum of money—namely gold and silver—that in a series of years it has expelled in utter loss to the country. Not a picayune, in my opinion, have we ever had returned for it; for we could have paid for all the imports in our usual productions, which employ our home labor and navigation, for precisely that sum less than they have cost, and retained the $400,000,000 in coin, if we had given it value by use, and never degraded it by the addition of fictitious dollars to the currency.

And what an incubus of debt is piled upon these four hundred millions of kiting! Anyone who can estimate how debt piles upon debt, and how a comparatively small sum of money will circulate by payment from one to another and discharge it, may form some idea of the immense difference to this country, to our resources in war as well as in peace, to the morality, the peace of mind, and happiness of the people, between struggling under this huge mass of debt, and having the coin necessary for its discharge. Then there are many millions of dollars of counterfeit bills, in active circulation, as good as the best, till they are found out; they are the bobtail of this ungainly kite, and have cost the country good gold, for their whole amount, like the kite itself.

When the export of specie is stopped, by the curtailment of loans, if no new increase of loans were made by the banks, and the labor of the country were left unobstructed in its normal course to increase commodities, inevitably the exports must increase. Labor is a necessity, everywhere, and production the consequence. Commerce is Argus-eyed and finds a market for everything. She is creative, also, and makes a market where none existed before. Nothing but nonintercourse or war can stop the imports; only an unwise and feeble policy would attempt to do it. The more valuable the foreign commodities, and the greater the imports, the greater is the demand upon us for labor and navigation to supply returns. Labor alone creates wealth. Business is increased thereby, and enures to the advantage of the nation possessing the greatest amount of productive labor, and the least amount of unproductive consumption. We need not fear the whole world in this struggle, with our present peaceful industry, and the general intelligence which enables the laborer to handle his tools to advantage, and produce results not to be obtained elsewhere.

The exports of merchandise would increase, indefinitely, until, by the importation and production of specie, the whole four hundred millions of kiting should be displaced by coin, leaving a purely metallic currency, and gradually melting away probably twelve hundred millions of debt, that now rides the community like a nightmare, and obstructs, by a high rate of interest and continual defalcations and revulsions, the productive labor of the country. When that point is attained, when there is no paper alloy in the currency to degrade it, gold possesses its natural value, and will command that value in exchange for every other commodity. In such a condition of the currency we might as well sell gold as anything else. Any excess thrown upon the market would not remain here. Prices would rise—attract the imports and check the exports, as of late, and the excess of money, which cheapens it in relation to its value elsewhere, would be exported. But as all the dollars would be real—the product of labor, creating value by their own creation, whether mined or imported—there would no longer be any loss to the country in exporting gold. Being substantial wealth, the dollars would command substantial wealth, for their full value, in return.

There is now a certainty of a rise in the value of gold, that is, a fall in the price of commodities, that will temporarily stop the export of gold, set in motion our exportable merchandise, and give a start to navigation. In every such revulsion as the present, the reaction reduces money below the amount that would occupy the currency in specie alone, if there were no paper money, and necessarily carries down the average price of commodities below the true specie measure.

From the considerations herein presented, it results that whenever the banks of this country have so reduced their loans as to put a stop to the export of specie, they have done all that can be done in the reduction of prices permanently; they have then reduced the currency till money is as valuable at home as abroad. From that point the path is easy to a full resumption of specie payments; and, infallibly, that path, if followed, would be one of continued activity in business, and of unexampled prosperity. To that point they are compelled to recede, at certain periods, for their own salvation: it is no new thing. Their promises then occupy no more space, and amount to no more, than the specie they have displaced.

To that condition the banks are now receding, violently, for the New York banks lead the country in this regard; and when they reach it, if they would then stand still and not again increase the fictitious money, specie would flow in, and our commodities flow out, in exchange, inevitably and rapidly. We should gain, in the increased value of money, more than we should lose in the price of merchandise. Our idle ships would soon spread their canvas to the breeze, and more ships would be required. Railroads would find full and profitable employment, their stocks would rise, like magic, in the market, and we should secure the greatest sale of merchandise, and enjoy the greatest prosperity ever witnessed on the habitable globe.

But will the banks do this? Surely not. Their present system imperatively demands the utmost expansion of debt to earn, or rather to win, dividends, and the utmost expulsion of money to make room for their debt. Their loans will increase, the moment they shall be relieved of the demand for specie beyond their receipts; and the almost fabulous supply of gold will secure this to them speedily. We shall then go on selling gold for less than it costs, or less than it is worth, and increasing debt as usual. Debt, failing, and unnecessary suffering—aching and breaking hearts, among conscientious men; and defalcation, lying, and stealing among the unconscientious—must continue to be conspicuous in the walks of trade, so long as this system controls the commercial finances of the country.

All this might be easily remedied by a few influential men in New York and Boston, in the establishment of institutions for banking with specie, obtained as deposits are obtained by the savings banks, borrowing—or rather obtaining from the depositors, who would be the only proprietors—coin at a low rate of interest, and lending at a higher, and charging commissions for service, thus giving a true and practical direction to public opinion in the use of legitimate money—COIN ALONE.

I have not time, or space, for the consideration of the remedy in this article.

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