Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
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Chapter 7
Interest and Cheap Currency
(Reprinted from
Hunt's Merchants' Magazine and Commercial Review, XXXVIII (Jan., 1858),
36-42.)
It is important to consider the nature of interest with reference to any movement
for the reform of the currency. It is almost uniformly supposed to be the value
of money, and this false idea is the cause of more obscurity, in the consideration
of the currency question, than anything belonging to the nature of the subject.
Interest indicates the value of debt—not of money. It is inversely as the quality
of debt—the poorer the debt, the higher the rate of interest. This applies to the
whole mass as well as to each individual debt, or to the average value of the debt
in every community. That of California is the lowest in value, with panic exceptions,
of any in the world. This is owing partly to the same cause that degrades the security
and increases the quantity of debt here—namely, debt banking. The bankers
of California grant two promises to pay the same dollar, upon the principle of our
chartered banks, and of course, when payday arrives, the same result follows that
always must attend this system of banking—somebody must break for the obligation
based upon the dollar created without value. Yet they grant only book-credits—people
love to deceive themselves by calling them "deposits." Adams & Co., and Page,
Bacon & Co., were ruined by this, with many other bankers and merchants. One
would think there could be no occasion to add dollars of debt to the abundant gold
currency of California; but there is no limit to the demand for dollars, whether
made of gold, or silver, or debt, because there can be no limit to the price of
commodities attending the increase and consequent degradation of the currency. Money
can be merged in price forever.
But the principal difficulty with California is her position as a gold-producing
country. This keeps the market glutted with commodities that, from the nature of
the case, must flow there. The fact that the material of money is cheaper at the
source of supply is only the converse of the fact that commodities are dearer there
than elsewhere. If it were not so, the gold could not be brought away. Nobody would
send merchandise from New York to San Francisco, intentionally, if he could obtain
as much gold for it—that is, as much price for it—here as there. California must
keep down the value of her gold to sell it, and this can be done only by
keeping up the price of her imports. Gold is almost her only crop; it is
but an inferior want—the superior or more essential wants are food, raiment, and
shelter; to procure these she must sell her gold. Thus it is that prices, with accidental
exceptions, must be higher there than elsewhere, and they will always attract an
excess of imports. Prices cannot be low there permanently; therefore that excess,
not wanted for money, is sold on credit, or advanced upon on time by commission
merchants, at the high prices caused by cheap gold, the bills are discounted by
the bankers, and the gold brought away for the sum of the proceeds. California is
too new a country to possess much capital. Gold is not capital more than any other
product of human labor, and relatively her commerce and her people are oppressed
with a heavy debt. For these reasons the rate of interest is almost uniformly higher
there than anywhere else. It is because of much debt and little capital.
As the quantity of debt, in relation to capital, increases anywhere, the quality
depreciates in proportion—most especially is this law applicable to the currency.
Therefore when our debt-currency, in which I include credits as well as circulation,
is at the highest, as in 1837, and in the middle of August last—when, according
to the fallacious notion of our people, we have the most money—interest
is at the highest. The truth is, then we have the most debt and relatively the least
money, and much of the debt is in the worst place in which it can present itself—the
currency.
As debt declines in amount it improves in quality, except during the frenzy of the
change; and when the debt-currency is at the lowest, interest is at the lowest.
It was so in 1843-4, and now most of the debt existing four months ago having been
removed from the market by defalcations and the reduction of bank loans, interest
will fall below the legal rate in a very few weeks (probably by the time this article
is in type), if the banks do not increase their loans, unless the same difficulties
should reduce the currency of England below ours in relation to commodities. Indeed,
it is there already on undoubted securities, and we may soon have all securities
undoubted, if we will, and make an end of future bad debts.
These details respecting California apply also to Australia, with the exception
that Australia was a cultivated country possessing capital, when California was
a wilderness, and has greatly the advantage of California in this respect. They
are necessary to show the fallacy of the argument against a specie currency drawn
from the instability of credits in California, and the high rate of interest prevailing
there. The truth is, an expanded and consequently cheap currency is the most costly
and wasteful machinery a nation can possess; the history of the world shows it to
be uniformly unprofitable or disastrous. It is evil whether formed of the precious
metals or of bank debt, for a cheap currency and high prices of commodities are
synonymous terms. It must encourage imports, check exports—excepting the precious
metals which must be exported—and involve the community in debt; and bankruptcy
follows in its train. This cannot fail to be obvious to every reflecting mind; nevertheless
it has been unaccountably ignored by writers and talkers upon the subject of the
currency.
A cheap currency is Adam Smith's great heresy, and here is his famous announcement:—"The
substitution of paper in the room of gold and silver money, replaces a very expensive
instrument of commerce with one much less costly and sometimes equally convenient.
Circulation comes to be carried on by a new wheel, which it costs less both to erect
and maintain than the old one."
This celebrated economist is as unfortunate in his illustration as in his argument
with respect to paper money. A paper wheel would not seem to be very efficacious
or valuable in a powerful machine. On the application of power, it is quite certain
the machine would stop or run to destruction, and such, to my mind, is the effect
of the paper substitute for money in the currency. It has thrown out of gear, repeatedly,
all the machinery of commerce in every nation that ever adopted it, and the wild
work we are having now is precisely owing to this nuisance in the center of our
system.
I have no quarrel with the bankers, and those who administer the system. They are
with us and of us, and are no more responsible for its evils than others. They unquestionably
lose as merchants and citizens, by its general evil effects, more than they gain
as bankers. The reader, therefore, will comprehend the distinction between the system,
which I condemn, and those who are engaged in its direction and details.
Dr. Smith understood perfectly well that every pound note, or every bank credit,
added to the currency, expels its amount of gold and silver; but it never seems
to have occurred to his mind that the additional currency must degrade the value
of the whole, before the precious metals can be displaced—that they must be sold
at the degraded value, and that the excess, which causes the degradation, must be
thrown off in the inflated price of commodities; so that the metals are utterly
lost to the community that substitutes the bank currency.
No man is more eloquent than he in praise of the policy which spreads the most widely
a thorough cultivation of the soil, as the true means to secure the greatest wealth
and prosperity to the nation; yet he did not discover that, if the nation exports
its gold and silver, it must retain the products, or stop the labor which renders
that cultivation necessary—his argument thus defeating itself—and that debt must
take the place of money, not merely in the currency, but in the repeated transactions
that would otherwise be made for money.
This is a most important mistake of Dr. Smith's, that has exercised a wide influence
in retaining debt in the currencies, and in disturbing the commerce of Europe and
America. As a pioneer in the science of political economy, when few facts had been
elaborated, upon which to form sound conclusions, it is not very surprising that
this, which appears to be the only important error in his system, should have escaped
his observation; but it is unaccountably strange that Ricardo, Fullerton, Mill,
and others, who have written at a comparatively recent period, should have followed
him in this specious, but false and destructive, doctrine.
What argument is there for a cheap currency, that does not apply, with equal force,
to cheap houses, cheap furniture, cheap ships, cheap apparel, cheap food, cheap
learning, and cheap everything? If this is true economy, how are we to have any
wealth at all—in what can it be invested, and how are the people to be employed?
Shall we return to barbarism, and put a stop to the employment and gains of our
merchants, to promote economy? The argument is perfectly absurd; it would reduce
the city to a group of shanties, and carry us back to the destitution of mother
Eve and her apron of fig leaves.
Everything of utility is wealth. It is the same to us whether we produce or import
it. In the former case, it is the direct product of our labor; in the latter, the
product of our labor supplies returns. Therefore wealth, obtained in gold and silver,
is the sure means of disposing of an equivalent amount of our products for cash.
To object to this as a dear currency, and complain of the loss of interest thereon,
is as futile as to object to the fine warehouses and dwellings, or to anything else
that constitutes the wealth of New York, and say that Irish shanties would be a
great saving, and answer every purpose.
If there is anything in the world we want dear and valuable, it is the currency;
for while we can keep it more valuable than that of other communities, we cannot
fail to sell commodities, buy money, and keep out of debt among ourselves and with
the world. A valuable currency may be obtained in two ways, either by reducing its
volume or by increasing commodities. The former, however, insures the latter, and
is in direct opposition to our banking system; for just in proportion as we cheapen
money, by increasing the currency, we sell our money, stop our exports, and of course
limit the employment of our navigation, and limit cultivation, production, and wealth;
and just in proportion as we pursue the opposite course, we thrive. Value, and therefore
wealth, are the same at any price. A barrel of flour at $5 is of the same value,
with a given amount of currency, as at $10, with double the amount.
We cannot stop the gold-producing in California. Under Providence, it is settling
that country—that is all the good we can say of it; but if the same amount of labor
were employed in any other production, it would be vastly better for the whole country,
and would result in more wealth, and in securing a better population. It is only
cheapening money, by raising the price of everything not made of gold; the only
advantage being that we obtain gold leaf, plate, and trinkets in exchange, for less
of other things. But we cannot stop it. What, then, should we do? Certainly use
the gold—all we can of it. Give it the most extended use, and thereby the greatest
possible value. Away with the debt banking! Let us have room for the gold. We have
room, by withdrawing the debt from the currency, for $400,000,000 of gold, before
the rest of the world can take any of it, unless more is returned than taken away.
By retiring the bank currency we can keep a constant balance of gold in our favor,
with a constant increase of business, and decrease of debt. While we are obtaining
it we shall pay for all the imports in flour, wheat, corn, fish, beef, pork, ashes,
and everything else that we can send out of our ports, not to Europe only, but,
in every direction, to all the world. But, to do this, we must quit tampering with
theories—we must use, and not neglect, the thing we promise to pay.
The quality, not the quantity, of the currency should be our constant care. If the
quality is pure and unadulterated, the quantity will take care of itself. No foreign
tariff, no foreign or domestic policy—short of war—no power on earth can prevent
us from obtaining and retaining more gold, as we have relatively more productive
labor, in proportion to population, than any other nation; except the abnormal power
exercised, but not, in my opinion, constitutionally possessed, by the State Legislatures,
of adulterating the currency in such manner that the mixture can be separated at
will, the pure taken off at the adulterated value, and the dross left with us.
A constant effort is being made to place those who are satisfied with a pure currency
in a false position. It is attempted to place us on the defense when we are plaintiffs
in the cause. We are required to show cause why bank notes, issued upon real estate,
imaginary estate, and no estate at all, are not as good as gold; why notes issued
upon the security of State stock are not perfect; why the whole real property of
a kingdom or a nation may not be coined into money by the transmuting power of legislation,
and why a promise to pay is not pay itself. To all this we reply, that
gold is gold, and silver, silver. We are perfectly satisfied with them for currency.
We are no theorists, and have no theory to propose —none to defend. We have nothing
to do with negations in the case. We state the positive fact that gold and silver
are money, possessing value; and that a promise to pay them is debt, and not value.
By what rule of common sense we are called theorists it is difficult to comprehend.
They are theorists who utter a promise to pay an ounce or a dollar of gold, and
propose to pay it with anything else. Whenever and wherever such promises have been
substituted for gold and silver, the result has been embarrassment and loss to many,
and ultimate ruin to more or less of the community. Dispel the mischievous theory!
Cease tinkering the currency with a paper wheel, and let us depend upon the solid
material of gold and silver!
The paramount law in commercial finance, I conceive to be, that the currency should
never for a moment exceed its natural volume. However little this may have been
understood by the economists, or however much neglected, it will infallibly become
a settled conclusion of political economy. Nothing can prevent a commercial country
from obtaining and retaining its due share of the precious metals to form the natural
volume of its currency but that neglect of their use, and substitution of debt in
their place, which degrades their exchange value. Because they form the medium of
exchange, and a given weight of gold therefore becomes the price of other exchangeable
things, people do not discover that, in parting with gold for something else, they
are merely exchanging one commodity for another—that there is reciprocal value in
the exchange, and that the parting with any additional sum of gold, in making the
exchange, is quite as likely to be owing to a fall in its value, as to a rise in
the value of the thing purchased; but it is so. The recent high prices have been
caused by the swollen and unnatural volume of the currency; they have been a degradation
of the value of money, and not a rise in the value, but only in the price
of commodities and property.
There is a surprising fallacy in the public mind respecting the quantity of currency
required to circulate the products of the country. If the principle of debt is not
in the currency, any quantity will be sufficient to transact any extent of business.
If commodities increase and the currency does not, prices yield until the export
trade takes off the commodities and returns specie. Prices conform to any volume
of currency, more or less, with equal facility. If expansion were not permitted,
contraction, with the present increase of gold in the world, would be wholly impossible.
Debt in the currency is therefore a fatal principle. It cannot be introduced without
being, in the first place, an addition to the natural volume of the currency, which,
if not tampered with by legislation, would always be regulated by the labor and
commodities offered in exchange therefor. The addition cannot remain. It must be
lost in the inflated price of other things which cannot be sold, and thereby virtually
cost us their equivalent in the gold exported, or it is paid away in the added price
of imported commodities. If, with a natural currency, corn could be exported at
$1 per bushel, and, by an artificial increase of its volume, the export of corn
is stopped by a rise of price to $1.10 per bushel, and $1.10 of specie goes in its
place, it is clear that the retention of the bushel of corn has cost us $1.10 in
gold. This is one form of the evil. Another is that the foreign imports have the
benefit of this rise of price, and the foreign commodity—a yard of silk for example—which,
with a natural currency, could be bought for the price of $1, and paid for
in a bushel of corn, will rise to $1.10, and must then be paid for in $1.10 of gold,
because the foreigner can take the gold to another corn-producing country and buy
there 10 per cent more corn with that amount of gold than here. In either case we
lose 10 per cent in standard gold, and shall continue to lose until the excess,
which is mere disease in the currency, is thrown off. I am perfectly satisfied that,
in this manner, our artificial money costs the country its whole sum in gold, and
restricts our business to the same extent, instead of increasing it as many have
supposed.
But there is another evil, of still greater magnitude, which is the prime cause
of our present financial difficulties, and of all the financial difficulties we
from time to time experience—namely, the dollar of debt, created without value and
placed in the currency, creates an obligation, or is of itself an obligation, that
never can be paid. If the bank should lend gold to its customer, it would
be one thing—value—and there would be value in the hands of the
customer to repay it. Nothing would be added to the currency thereby; no depreciation
of the value of money and consequent rise of prices would result therefrom. But
the bank lends quite another thing—it lends debt and no value.
Nothing goes into the hands of the customer, or the community, to repay it. It is
the difference between something and nothing—between value and no value; and yet
this thing of no value becomes currency, in addition to the currency existing before,
and necessarily adds itself to the prices of all things—labor and commodities. In
other words, it depreciates the value of money for its whole amount.
Suppose the volume of the currency to be doubled in this manner, then a commodity
that sold before for $5, and probably for cash, would rise to $10; and as this artificial
money is obtained only by creating a debt in exchange, the commodity will almost
certainly be sold on credit, for the debt banking system must be supported by debt,
of course. The reciprocal debt of the people and the bank becomes $10, which was
only $5, or nothing before. Probably the article will be sold three times over on
credit, at the average price of $10, creating $30 of debt. When the liabilities
of the banks return upon them in a demand for coin, they demand the same sum from
their debtors; they demand a value which never existed; one-half the sum
was mere price—it cannot be paid. The banks attempt to collect $10, five
of which they never loaned and never possessed. The people possess nothing for it
but the debt of the banks, and the banks possess nothing for it but the debt of
the people. It is a reciprocal demand for coin that is nowhere, or for an equivalent
value that is nowhere—that never existed. It is reciprocal destruction—the fight
of the Kilkenny cats. Payment is impossible, and the $5 of artificial currency thus
created, inevitably creates in this transaction $15 of bankruptcy. I am making a
very moderate assumption in this illustration, for the capital of the bank is not
value. It consists mainly of credits checked out of other banks, continued
in an endless chain of debt, and when the demand comes for coin, it is not merely
dollar for dollar they call back, but frequently five for one, depending upon the
extent of their expansion. Moreover, the removes of a commodity between the producer
and consumer probably average five, all of which, by this system, must be made on
credit; but the number and extent of these credits, whether longer or shorter, obviously
depend upon the expansion or contraction of the bank loans. If five, then every
bank contraction compels the settlement of five times its amount in bankruptcy.
There are three most important points or doctrines, herein presented, to which I
ask the especial attention of the reader:—
1. Interest must be dear, and debt plenty, when and where the currency is
extended and cheap.
2. Every dollar of currency, created without value, costs the nation its whole sum in
standard gold, and restricts
the business of the country. Europe adds her supply to the stream of the pre cious
metals, flowing to the eastern nations from this country, upon the same unprofitable
terms.
3. The dollar of bank money creates an obligation that never can be paid,
and repeats the defalcation for every obligation based upon it. History and experience
demonstrate this fact in every bank contraction, great or small.
These may be my discoveries. I do not find them mentioned in the writings of the
economists, but to my mind they are self-evident truth.
Such are the evils of our system of banking, resting as it does upon the competition
of more than 1,400 banks, whose profit and whose existence depend upon the abnormal
principle of making interest on their debt payable, and degrading the currency.
Who would not issue "bills payable," without limit, if he could be permitted by
law to charge interest thereon, and how is such a power to be restrained?
A great fact, like the general bankruptcy now prevailing in the commercial world,
does not spring suddenly into existence by accident. Like every other fact of human
history it has its primal element, or ultimate atom. That element or atom is the
dollar of debt added to the natural volume of the currency, and all remedies for
the financial evils, of such frequent occurrence in this country, must be directed
to the removal of this destructive principle.
I think it would not be difficult to establish in New York the legitimate system
of banking with coin, if the Legislature of the State would modify the
usury law in favor of institutions conducted upon that principle, so as to permit
them to borrow and lend money, and nothing else, without restriction as
to the rate of interest. But the restraint upon their loans must apply to their
credits as well as their circulation. The credits to lenders would be payable at
stipulated dates; the credits to borrowers must not be loaned for a dollar or a
moment. They would be merely the safe keeping of coin, liable to be drawn out at
any moment.
But to facilitate this system of banking, I think a law of Congress is necessary
authorizing the deposit of coin in the subtreasury, and issues of certificates for
the same, of the denomination of $20, and upwards. A paper currency being necessary,
it should be so much superior to any other as to have the preference in circulation.
It should be free from doubt and subject to no evasion.
Small payments for remittances would be necessary, for which coin would not be convenient,
such as subscriptions to newspapers, etc. These could be paid in coin to the postmasters,
who should be authorized to draw for the amount on the subtreasurer in the city,
to order. The national government can well afford to be put to some charges, and
ought to take every available measure to relieve the country from the present system
of banking with debt, which is continually piling debt upon the people and spreading
bankruptcy and wretchedness over the land.
With these measures on the part of the State and the United States, I do not see
why a currency of money might not be established in New York, and if there,
its adoption by every other State would, I think, be a necessity—for the exchanges
would be so constantly and so largely in favor of New York, that she would infallibly
take the coin for every convertible note or credit issued in the other States without
value. It would be necessary to place this system under the supervision of a strong
board of currency, for the whole State, to enforce the law.
I am clearly of opinion that when, if ever, New York shall establish a specie currency,
with no evasions, the present ruinous system of banking upon debt will be at an
end in this country forever.
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