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

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Chapter 8
Organization of Debt into Currency

(Reprinted from The Bankers' Magazine and Statistical Register, XIII (Aug., 1858), 137-42.)

This work is being vigorously pressed forward by the New York City banks, they having increased their loans from $96,000,000 in October last, to $120,000,000 at the present date—7th July. By our unnatural system the deposits and circulation of the banks constitute the medium of exchange, and these have been increased in New York City since last October, from $61,000,000 to $114,000,000. The large reserves of gold with the continued receipts from California indicate that there will be a much greater expansion before they can be exhausted. The deposits and circulation are not money but currency, the most effective portion of which consists of the deposits; for, through the medium of the deposits, all the larger transactions of commerce are accomplished. It is a common error in estimating the currency to omit the deposits, for by the magic of our system the borrower often or generally becomes the lender and depositor of currency. Although both borrower and lender cannot have the same dollar at the same time, both are privileged to check upon it, and may offer it for purchases; thus it produces the same effect upon market prices, by degrading the exchange value of money, as double the amount of gold and silver in the hands of individuals. A sum thus available at sight by a check on the bank is as much currency as the bank note deposited in one's pocket.

The real lender who deposits his money in bank, if a buyer in market of anything, creates a competitor with his own money. According to the homely saying, he "lends a stick to break his own head." The balance of cash on hand of both borrowers and lenders is in the deposits; they are convertible into specie on demand, if not demanded too largely and too fast; they pass from hand to hand in checks, are used for purchases like coin, and in competition with coin, and the banks discount upon them as upon their circulation or their specie: in short they are bank debt organized into currency, differing only in form from the circulation: the latter consists of certificates issued for a portion of the debt, while the former is that portion of the same for which certificates are not issued.

The term "deposit," as applied to the amount at the credit of a borrower, is in truth a misnomer, for the borrower deposits nothing—there is no money in the transaction; it is simply an exchange of debt. Yet it is effectually currency to be used as equivalent to coin at any moment. In event of a bank contraction, however, it is apt to become a most embarrassing claim upon both bank and borrower, for real dollars that are nowhere—that never existed.

The organizing of debt into currency is the prevailing error of this commercial age. It seems to suit the genius of our people, and is more practised in this country than in any other: next it prevails in England, less in France and Holland, still less in India, and not at all in China. To whatever extent this system is in use in any country, the precious metals are expelled; to that extent they cannot remain, for money and debt are natural antagonists, like fire and water; one must extinguish or expel the other. Consequently we now find gold and silver flowing from the United States— where we use debt in their place even to the denomination of one dollar in the bank note—to England, thence to Holland and France, and, by the Alexandria steamers, to Egypt: thence through the Red Sea to India and China, whence there is never a return. Official accounts show that over $100,000,000 of gold and silver are manifested as shipped from England and France by those steamers annually of late years. Some further amount is taken by passengers; so it seems probable that nearly or quite two-thirds of the sum of the world's production, yearly, of the precious metals, is being thrown upon Asia by the bank debt currency system of America and Europe.

Very extravagant figures are frequently made respecting the production of gold and silver, but taking official statements of coinage and of exports from Mexico, California, and Australia, making allowance for the amount brought away by passengers, &c, there appears to be no reason to suppose that the production of any one year has ever yet exceeded $180,000,000 in the whole world. Before the gold discovery in California it was but $55,000,000 per annum. Now we find about double that amount going to Asia every year—the silver to China, its place in Europe being supplied with gold.

But the effect upon the general commerce and the individual prosperity and happiness of the people of this country is our concern in this matter. Nothing will prevent the precious metals from going where there is an effective demand for them, and nothing will prevent them from leaving the country where such demand does not exist. If we do not use them for currency they will go where they have that use in addition to other uses; for, like all other commodities, where they possess the highest utility they possess the highest value, and under the keen instincts of commerce they are as obedient to the law of value as matter to the law of gravitation. They only are money; a promise to pay them is debt, and that debt is not equivalent to money, unless coin is exchanged for or remains deposited and pledged to meet it.

The "promise to pay," whether in the form of note or credit, placed in position to be used as currency in excess of the coin in the country, becomes a degradation of the value of gold and silver, and will compel the country to part with those metals at the degraded value, until the whole amount of the excess is exported, and absolutely lost in capital. The delusive effect of price, which is not understood by one man in a thousand, blinds the community to the truth in this matter. I have before illustrated this effect in your magazine, but it will bear repetition.

Let us suppose that we possess a currency of $100,000,000 of gold and silver, all active and of course measuring the price of all our commodities; for by the law of value all the commodities offered for sale will be exchanged or valued against all the money offered for their purchase. Now if we go into the banking system of exchanging notes and credits, and add 10 per cent or $10,000,000 of bank debt in notes and book credits to our currency, all other things remaining as before, we shall infallibly raise the general price of things, 10 per cent. This will appear to give us $10,000,000 of money, in addition to what we possessed before, and, it being supposed that the ratio of money to other property in every commercial community is as 1 to 25, it will appear to add $250,000,000 to our property. Some statistician will now quote this as evidence of our great smartness, and of the advantage of our banking system, by means of which the wealth of the country has been increased $250,000,000. Alas for our smartness, which overleaps itself and falls on the wrong side. We have, like the silly shopman, gone over our establishment and simply, very simply, marked up our goods 10 per cent, by reason of which we have driven our customers into our neighbors' shops. The barrel of flour, which the exporter might have shipped at $5—will now be worth at home $5.50. Wheat, beef, ashes, and the numerous articles constituting our exportable merchandise, which employ the labor of the country in production, will be placed above his limits; he cannot export them, and instead of the barrel of flour at $5.50 he sends off $5.50 in gold, with which he buys 10 per cent more flour elsewhere, and our producers, our traders and our ships have so much the less to do. This effect is produced in the average upon all our exportable commodities; we retain them or stop their production at the cost in gold of 10 per cent more than they are worth. If the shopman before mentioned, should pay his debts at his own fancy prices, and where he owed $1.00, that he might pay in his own merchandise, should elect to pay $1.10 in gold, he would be no more foolish than we.

But this $10,000,000 excess of currency must run off in gold and silver. Our bank notes and credits cannot be employed in place of the metals abroad, and when our prices are brought within the natural limits of the natural currency, the shipment of gold and silver stops, and commodities are exported as before the inflation. We have now the same volume of currency as before, namely, $100,000,000; but $10,000,000 of it is the bank currency of debt, for which we have parted with that sum of capital, and $90,000,000 of the original gold and silver. We have lost $10,000,000 of gold and silver in the inflation of price, having obtained nothing in return more than we could have had in exchange for our own domestic produce at one-tenth less price and retained the $10,000,000 of gold and silver besides. And now as the demand for gold upon the banks for shipment has ceased, and they can make no dividends without lending their debt as money in excess of their capital, another creation of $10,000,000 of debt currency is brought upon the market: $10,000,000 more of gold leaves to make room for it, $10,000,000 of our domestic produce remains behind that would otherwise have been sold, and, after the usual fall of prices, revulsion and bankruptcy, we come again to the original volume of the currency—$100,000,000, now $20,000,000 of debt and $80,000,000 of coin—and to shipping prices for our usual domestic products again; and we repeat this operation until we reduce our specie to the minimum, below which specie payments cannot be maintained. Now in parting with gold by this degradation of its value in the artificial increase of currency, we positively lose not only the sum of capital thus thrown away, but all the gain that so much real capital well employed would produce, for we have no capital left in its place—nothing but debt, which compels the whole country to buy and sell goods on debt and credit, with the certainty of extensive failure, in every bank contraction, that would otherwise be exchanged with money, for if the money remained it would be employed.

No nation or community with an open commerce can maintain a currency in proportion to commodities in excess of the average currency of the world; for, as soon as that excess appears, prices rise, check exports, encourage imports, and the precious metals, which are the only universal currency, must flow out until the equation of international demand is restored by the true average relation of money and commodities. In this country the whole currency usually consists of about one-third coin and two-thirds bank debt, the latter being sustained by repeated expansions that drive off the gold by cheapening it below the value of merchandise as fast as it appears, for all they hold of it is a dead weight to the banks, upon their present system, which derives its support from the loaning of debt and not of money.

I wish now to call attention to the fact, that for some time past, while the imports have been very limited, the exports of domestic produce have largely exceeded those of the corresponding period of last year, not in the aggregate price but in quantity and value. The value of money being greatly enhanced—that is, less money purchasing more commodities—the true value of our exports recently has been largely increased. Money for a brief period has been more valuable in this country than merchandise. Consumption and demand are naturally overtaking supply in the commodities that we produce with the greatest facility, and the country is just beginning to do well by a natural course of trade. Now, to check this, comes a renewed "organization of debt into currency"—an artificial increase of money to cheapen it. It wholly depends upon which we shall furnish the cheapest—money or commodities—whether our producers shall prosper and our merchants and navigation be well or ill employed. Since the world began there never was a period when there was less occasion or apology for the use of artificial money—when real money in gold and silver was so abundant, and so inviting use to give it value. But this is made by the artificial currency system, the foundation of the most extended mischief. Instead of using gold and silver for currency they are merely used as the basis of the greatest possible inflation by the banks, and consequent increase of debt in the community.

It was the cheapening of money among the nations using a currency of debt, and the inflated prices and obligations inseparable therefrom, which produced the revulsion last fall. We cannot restore prices to meet those obligations: many of them have been and more will be closed in bankruptcy, and if we should inflate again to the same degree it could only be succeeded by the same destruction. We cannot provide for those debts, and we should prevent any artificial increase of currency to prevent a future and similar catastrophe. But the banks of the city of New York control the currency and commerce of this country: when they expand, all other banks expand, and when they contract, all others must contract or fail. They are the financial directors of the creditor city of the country and thus of the whole country: they can cheapen money and compel its export with an increase of imports, or they can enhance its value, cause it to be retained, and secure the export of domestic produce and a decrease of imports at will. We have only to look at their figures to know what is about to happen in this regard, and it is plain that they have now determined to cheapen money and export the gold again.

We shall soon see all the other banks of the country increasing their loans—organizing debt into currency—general prices will rise; the present increasing exports of domestic produce will be checked; imports will increase, gold will flow out of the country at the rate of two or three millions of dollars per week; interest will rise with the increase of debt and decrease of real money; more banks will be demanded, because, we shall be told, the pressure for money and the high rate of interest make it evident that more capital and money are needed, and the additional banks will be expected to furnish additional capital and money. They will be obtained of course; for there is not a State legislature in the country, with the exception of that of Arkansas, but supposes that banks furnish capital and money: not a State but Arkansas suspects the truth that the banks of the present system create only debt, substitute that debt for money, and drive money and capital from the country. And we shall go on in this false direction until we come to another financial revulsion, as severe as the last, with debt riding the community to destruction, unless—and here we come to an effectual remedy—unless some influential banker, merchant or capitalist of New York shall take interest enough in the subject to understand it, and then take efficient measures to aggregate money capital in the currency—to organize into it money instead of debt, and thereby prevent money from being released for exports instead of our domestic produce.

I repeat, what I suggested in a previous communication, that individuals of wealth in New York, having the confidence of the community, can, with profit to themselves, reform the present abnormal currency and commerce of the country. If capitalists, like Messrs. Astor, Wardsworth, Perritt, Peter Cooper, and others, would inaugurate the system of banking with money, aggregating a liberal capital of their own with that of lenders, in an institution, with or without a charter, for lending their own money, borrowing of others at a low rate of interest, lending at a higher, and dealing in exchange, issuing only coin, or certificates of deposit against coin retained to meet the return of the certificates, and requiring payment in coin, or coin certificates without exception or evasion, obviously gold or silver would be retained in circulation or in their own coffers, to the extent of their operations; and to the same extent, domestic produce would be exported instead of coin in payment for imports. To a much greater extent debt would be extinguished and embarrassment prevented in the country; for at present every dollar of bank currency, which is nothing but debt, requires ultimately a dollar of real value to discharge it. Coin is demanded when no coin or value was created with the dollar of currency, and none passed on either side: the currency is required to be renewed to pay its counter debt, and the counter debt is mortgaged to pay the currency.

All our transactions are through the medium of "notes payable," and all the currency furnished by the banks is mortgaged to pay those notes, so that no money is in circulation to do business for cash. The more of such currency we have the less money we have, the more extended are the credits in time and amount, the greater the risks of business, and the higher the rate of interest. Probably five dollars of debt are thus created by the absence of one dollar of real money, to do the same amount of business, which, by being paid from hand to hand in sales for cash, would prevent them all. People wish to do business for cash but do not see that it cannot be done so, because we part with our cash to foreign countries, as soon as we obtain it, by keeping it the cheapest thing we have to export. We are thus obliged to go through the operation of kiting with the banks: it furnishes no money, being merely an exchange of debt and credit. Whenever the banks contract their loans the means of payment fail and the obligations founded thereon fail likewise—they cannot be paid.

In anything I say upon this subject there is no hostility to the existing banks. The fault is not in them, but in the delusive system which public opinion created and sustains. To that public opinion we must look for the remedy, and to that I address myself. A man or body of men cannot be blamed for pursuing a reputable business which the public sanctions and deems necessary. I believe, however, that the stockholders of banks, in the average, lose much more by bad debts and the general instability of securities and property, caused by the present system, in their individual affairs than they gain by their privileges or interest as bankers.

An institution like the one herein suggested would take money instead of debt from all institutions lending or dealing in debt as money, and ultimately bring them to its own terms of dealing in real value. This would finally make New York the centre of the exchanges of the commercial world, unless London should adopt the same policy.

I have not much confidence in legislation with regard to any improvement of the currency or the trade of the country, but the general government may do much to aid the restoration of a natural currency by receiving coin in the various subtreasuries and issuing certificates therefor, always retaining the coin on special deposit to meet the returned certificates.

We cannot eat our cake and have it too; this truth was settled to the satisfaction of each one of us in the nursery; nevertheless, we try the same absurdity in principle in our currency, and the consequences are demonstrated in financial revulsions, such as that which befell the country last fall. We must accept money or debt for currency; we cannot have them both for the same sum at the same time.

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