Organization of Debt into Currency and Other Papers
by Charles Holt Carroll
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Chapter 9
The Banking and Credit Systems, I
(Reprinted from
Hunt's Merchants' Magazine and Commercial Review, XXXIX (Sept., 1858),
306-14.)
To the Editors of the Merchants' Magazine:—
I have long wished to write an essay for your magazine on the distinction between
the banking and credit systems, but have been deterred by the cool indifference
of the public to the currency question, since the revulsion of last fall, which
ought to have aroused public attention to the subject, and by an unfortunate disposition
I discover in myself to scold about it. With every wish to respect public opinion,
I cannot do it—cannot find anything in it to respect upon this subject. I try to
smile with all my might, but find a scowl all over me as soon as I take pen in hand
to write about it. When I would say the softest thing in the world, I feel that
I dogmatize. With this difficulty to contend against, Messrs. Editors, I will, with
your indulgence, proceed as gently as I can with the subject that heads our pages.
I know a worthy merchant of inveterate business habits who worked himself almost
to a mummy in the pursuit of a gainful trade. Scrupulously punctual to every engagement,
and scrupulously honest, he pursued the direct course that all prudent men and fathers
and mothers advise, never turning to the right or left from his regular well-accustomed
traffic for more than thirty years. Very cautious about bad debts, and very successful
in avoiding them, he had accumulated a clear safe balance in July last year, to
the credit of his stock account, of $175,000, beyond all contingencies excepting
the exchange value of money. Now this worthy man, with all his industry, caution,
and integrity, was swept clean dry of his whole estate last fall, simply by the
sudden appreciation in the value of our currency consequent upon the contraction
of bank loans. In a month, or less, one dollar rose in the market to the value
of two dollars, and conversely his commodities and his ships fell in price
50 per cent, or from two dollars to one dollar. Of course he was in debt, as almost
every man in business must be in this country, especially in Massachusetts, where
we rarely have more than $5,000,000 of money in the whole State; the only possible
mode of doing business being to take notes receivable and grant notes payable, getting
the notes receivable discounted in bank to meet the notes payable discounted by
others in like manner; repeating the same continually and using no money at all.
He was obliged to pay two dollars of debt, contracted on the former measure of price—the
depreciated currency—with one dollar of his merchandise, valued by the new measure
of an appreciated currency, as far as it would go; and the balance from his previous
accumulations. This took the whole; it was too much for him; his mind gave way,
and he is now in an insane asylum, a hopeless maniac.
The fault of this gentleman was that of the great mass of our businessmen, which
bankrupts nearly the whole of them and sustains our present monetary system; he
never cared a button for the science of his profession. He believed the
only mercantile science consists in buying cheap and selling dear; and, with this
peddler-achievement and exemplary patience, he expected always to manage, as he
had done, successfully, a foreign business requiring three months frequently to
countermand his order, and further or check his investments. During the bank contractions
and consequent fall of prices in 1851 and 1854, I observed he declined selling;
he held on to his commodities patiently till the banks inflated again and prices
rose, when he sold his cargoes and secured his profits. He had no reason to doubt,
in his philosophy, that the same result would immediately follow the contraction
of last fall. He never bothered his head with the consideration of the power of
gold to serve as the basis of inflation of the currency of the world, nor troubled
himself with the irresistible nature of self-interest in the debt-currency system
to accumulate debt that will command interest, as money, till the obligations of
the community to pay money that never existed cannot be discharged.
All this was none of his business; his business was to import hides and wool, and
get the most he could for them, and he pursued it faithfully. Unfortunately, it
became an essential part of his business to get money when all the money in market
was only money by name—when it was debt by nature, requiring to be paid as much
and as fast as his own. This was a dilemma—a principle of self-destruction in the
currency—a power of eating itself up—not provided for in his philosophy, and he
was ruined.
Now, I find wise men in plenty—men wise after the fact—who think he ought to have
sold at a loss on the early decline of the market; but this again was no part of
his business; it was his business to sell at a profit, he had always done so and
succeeded. Why should he do otherwise? He knew much of the demand and supply of
wool and hides, and believed they altered in price only by a deficient or surcharged
supply. Money, with him, was a "standard of value"; it always stood still in value
except in the rate of interest, while everything else moved. He looked upon the
increasing bank currency to be very beneficial, and had no conception that the rise
in his hides was really the depreciation of money, and that the bank money was money
only in name—that the banks would require real money to pay it at the time when
he would most want money himself. In this he did not differ from nine-tenths or
nineteen-twentieths of the merchants of this country; they look for the value of
money only in the rate of interest, where it is not; the rate of interest having
nothing to do with it, excepting to be high when money is low. Thus his fortune,
his peace of mind, and the happiness of his family, have come suddenly to an end.
Hundreds of others have suffered and are suffering, some even unto death, with broken
hearts, under my own observation, from the same cause. I hold the merchants of this
country responsible for it all; it is not the fault of the banks.
True, the origin of the evil was with the Bank of England, somewhat accidental I
think, but our merchants sustain it to their own destruction, with no possible benefit
resulting to the country, but with a loss of $50,000,000 of absolute capital, yearly,
and the earnings which so much real capital in gold and silver would accumulate.
With a little attention to the science of their profession, and a very simple and
easy practical effort, they can reform it all, and leave England and other countries
of Europe to enjoy the invention of the Bank of England of organizing debt into
currency.
I have not time and space, in a short essay like this, to pursue the history of
paper money or bank currency, but I may briefly say that the Bank of England was
established as a mere go-between or agent to borrow money of the people
and lend it to the government in 1694. The sum originally borrowed and loaned was
£1,200,000 for an annuity of £100,000, or £96,000 a year, interest at the rate of
8 per cent, and £4,000 a year for the expense of management. This was legitimate
and right; the lenders were the stockholders, and the government was the borrower.
At five several periods this operation was repeated for various amounts, with a
slight difference between the stock and the government loan, until in 1722 the capital
amounted to £5,560,000 nearly, and the loan to government £5,375,000. The bank had,
therefore, an un-loaned capital of £185,000.
During all this period, the bank issued its notes, received individual deposits
and loaned them, but there is no evidence of its having loaned more than it received,
and it did a legitimate banking business until 1722. Then, in pursuance of an act
of Parliament passed in 1721, it purchased stock of the South Sea Company to the
amount of £4,000,000. To enable it to make this purchase it took subscriptions for
only £3,400,000.
I do not find the reason stated for this deficiency of subscription, but presume
the bank did not intend it. It may be inferred that distrust of the South Sea Company
at the time rendered it difficult or impossible for the bank to obtain the full
sum of capital to purchase the stock or annuities for £4,000,000. It was in the
form of government annuities of £200,000 which were sold to the bank at twenty years'
purchase, or at the rate of 5 per cent per annum. About this period the credit of
the government was not always, or often, as good as that of private persons.
The capital stock of the bank, therefore, fell short of its loans in the aggregate
£415,000; that is, it was deficient in subscription for the South Sea stock £600,000;
from which, deduct the previously unloaned capital, £185,000; deficit, £415,000.
This sum, then, the bank loaned in its notes and credits more than belonged to it;
that is, of the money lodged for safe keeping belonging to its depositors and the
holders of its circulation, charging interest on what was not its own. To this deficit
it gave the very respectable name of "undivided capital." I think it was an undivided
swindle upon the people, who did not understand it then, and who have never
properly understood it since. The principle of a debt currency, therefore, appears
to have had its origin with the Bank of England in the "South Sea bubble," the most
outrageous bubble that ever existed. This principle has been extended under the
still more agreeable name of "money," and has been constantly disastrous to England
and to every other country where it has been adopted. Although property is produced
and aggregated in spite of it, that property is robbed from its true possessor and
transferred to the capitalist by this iniquitous scheme.
Afterwards, about 1754, the Bank of Amsterdam made a bold experiment of the same
sort, rather more honest, because more easily understood. That was a bank of deposit
only, and payments were made by transfers from one account to another on its books.
It was bound by its principles to keep at all times in its coffers bullion equal
to the full amount of claims upon it. About 1754, however, the Burgomasters in direction
privately loaned 10,500,000 florins, about $4,200,000, to the States of Holland
and West Friesland, and the Dutch East India Company. When this fact transpired,
on the invasion of Holland by the French in 1794, the conduct of the directors,
who had kept the transaction secret forty years, met with universal contempt and
derision; but the principle was precisely the same as that of the loan to the South
Sea Company by the Bank of England in excess of its capital, and of the present
system in England and here, creating two demand obligations on one value, authorizing
both lender and borrower to check upon the same money at the same time, thus increasing
and cheapening the currency with mere "promises to pay."
The origin of this debt currency, or bank money, generally called "paper money"—although
the deposits are as much currency as the circulation—explains its nature. It is
debt organized into currency through the agency of a bank, over and above
all the money in the world. In its nature it cannot be paid, because it adds itself
to the price of property, and consequently to all money obligations, which can only
be paid while the currency exists, on the measure of which they were contracted.
The contraction of this currency contracts prices and the means of payment, creates
a pressing demand for money to discharge the counter debt, and, to discharge itself,
an equal demand for money which was never created. While its volume remains entire,
it may be exchanged against commodities and may transfer debt, but it cannot make
a final payment of debt. If final payment is demanded, either of banks or individuals,
bankruptcy alone can discharge the sum required. If the bank gets paid, the deficiency
must fall somewhere else in the community, for the money is missing.
I have thus briefly sketched the origin, nature, and effects of the debt currency
partly to meet a statement I find in an article on "Banking and Currency" in your
August issue, that banking ought not to be considered the cause of the late collapse
in the affairs of the commercial world, but that it, and such periodical revulsions,
must be ascribed to the general system of credit of which banking forms a part.
I am obliged to differ with the author of that article in this, and also in another,
position he assumes, which is, of course, the popular notion upon the subject, namely,
that money is the "standard or measure of value."
It is not always easy to determine whether a man is in the habit of getting drunk
because he is crazy, or whether he is crazy because he is in the habit of getting
drunk. It is clear that the debt banking and very extensive credits exist together,
and are mutually dependent. If one causes the other, it is also clear that the father
of the other is the father of all the mischief which results from both.
It is certain, to my mind, that money, to buy and sell with, is greatly preferred
to debt and credit by most men. This is attested by the constant complaints we hear
of the impossibility of doing a cash business, of the necessity of credits, and
of such long credits, and also by the frequent attempts at combinations to shorten
credits, which, after some eloquent speaking and some very energetic resolves, duly
published in the newspapers, end in nothing, of course. The failure of all such
efforts is inevitable from the nature of our currency. It is a currency of debt
and not of money —it is fed upon, and can only be sustained by, debt, and is debt
itself, which "makes the meat it feeds on." The debt currency, then, and the banking,
which is the machinery of its manufacture, are the cause of the periodical revulsions
in the commercial world. The unstable currency created by banking was plainly the
cause of the collapse last fall, that ruined my friend of the wool and hide business,
and thousands of others in this country and Europe.
Having adopted banking as our method of producing currency, instead of applying
our gold to the purpose, it is quite impossible to retain money, and business cannot
therefore be done strictly for money, except in small grog and oysters at retail,
the transactions in which are within the specie circle, below the denomination of
the one dollar note.
The process by which people are forced to provide promissory notes for banking is
perfectly simple; it is by keeping dollars of currency in a little fuller supply,
compared with commodities, than other countries. The dollars then become cheaper
than commodities, and other countries send us their commodities—take the dollars
made of gold and silver and leave us dependent upon those made of paper, which are
co-existent with, and can only be produced by, promissory notes. This is a tread-mill
operation; a man once in for it must step on or break his leg. The bank
notes and credit inscriptions having been obtained on a promissory note, that note
must be paid; other bank notes and inscriptions must be procured by producing another
promissory note for discount to pay it, and so on in an endless round of exchanges
with the bank, of debt for debt. As the bank lends no money, only promises, when
a compliance with its contract in honest specie dollars is required, the dollars
are demanded of its debtors who have none—who never had any. The paper and inscription
dollars, of course, can no longer be furnished to them, as the required issue would
destroy the bank. The debtors are simply cornered. Hence comes the "revulsion,"
which your contributor on banking and currency attributes to the "credit system."
This term appears to have been originally adopted, as language frequently is, to
conceal ideas; it is a very innocent looking name for the mischief-working banking
system. So people fancy they borrow credit of the bank, but the man must
be very blind who does not see that the bank note he holds in his hand is the bank
debt and his own credit. He is lending capital to the bank while
he holds the note, and the bank is charging him interest on his own capital—took
it in advance when the note was issued. It is one of the sophisms of the system—credit
sounds so much more pleasantly than debt. Capital and money are tortured in the
same way out of all their proprieties by the present banking system.
The "credit system" is well enough; banking would be well enough if this wretched
and dishonest principle of debt in the currency were abandoned. It is the very error
of the moon to suppose, as many do, that an honest man would find difficulty in
obtaining credit under a metallic currency system; he would be altogether more certain
of obtaining it; the difference is, he would borrow money instead of debt, and if
honest and frugal he would be sure not to fail, which he may be almost sure to do
now. Debt and credit would then move harmoniously together, and not get periodically
at loggerheads after the fashion of last fall. Debt in trade would be met by stable
value in the currency, and could do no harm. Let the banks use money, and
make their profit out of the difference of interest by lending at a higher rate
than they borrow, and the production and export of commodities and all business
would materially increase. All would then be well with us on this side of the Rocky
Mountains.
As to California, her gold-producing afflicts her with a cheap currency, and she
aggravates the evil by adding to it bankers' debt, in credit inscriptions, when
it was already too cheap before. She must inevitably be glutted with imports, and
must suffer the consequences.
We of the Atlantic States have not the infelicity of a naturally cheap currency
to contend with, which is the misfortune of California, that must keep her prices
higher than non-producing gold countries; otherwise commodities could not be sent
there, and she could not export her gold. We buy her gold with the products of profitable
labor, beneficial to us in the cultivation of the soil and in the use and improvement
of the arts, as we do the gold of Australia or Russia, and the silver of Mexico.
It is our folly, not our misfortune, that we do not know it to be better than debt
for money, and learn how to keep it.
Our merchants generally think business cannot be done on any other than the present
system. Very well, gentlemen; so long as you entertain that opinion, and act upon
it, you will grasp wind when you think you grasp wealth. Nothing is more certain
than that, if you will use money for the medium of exchange, you will import or
retain $50,000,000 of gold and silver annually by exporting $50,000,000 of our domestic
products more than you do now, until gold shall be in natural excess in the Atlantic
States. It would be an absolute gain of capital for its whole amount, with the profits
to be derived from its use; it would increase your business greatly, with an almost
entire absence of bad debts; and, so long as the present increase of gold continues,
with an almost constant advance of prices.
This brings us to the consideration of the nature of promissory notes, bills of
exchange, and ledger balances, unconnected with the debt system of currency. Have
they in any degree the effect of currency upon prices? Surely not. Their affinity
is wholly with the property from which they are derived, and against which the currency
is exchanged. They are merely a postponement of the money operation, from the time
of the purchase to the maturity of the obligation. Money that would have been required
at first will be required at last, to accomplish the exchange, and if the money
is not then sufficient for the purpose, prices fall until it is sufficient, the
same as if the commodity purchased had then been presented in the market for the
first time.
I do not see why, with a currency of gold and silver, there should necessarily be
any more competition in purchases on time than in buying for money, nor any more
tendency to advance prices, because the constant maturing of notes would hold prices
in check. On the contrary, I think repeated transfers of the same commodity on credit
would frequently average payments for the same thing on one day, and have the same
effect as repeating the supply of the commodity itself upon the relative value of
money, which, of course, would be to reduce prices. Obviously, the more commodities
there are thrown upon the market the lower will be their price, and therefore the
higher relatively the value of money. The effect would be the same if several notes
for repeated sales of the same commodity should cause a demand for money on the
same day. But I do not insist upon this—it belongs to one of the most critical questions
of political economy—the power of the "rapidity of circulation," or, as J. Stuart
Mill suggests, the "efficiency of money." I wish only to establish the fact that
the common evidences of debt, apart from bank notes and balances, belong on the
side of commodities, and opposite to currency, in their effect upon prices and upon
the value of money. They would have no disturbing influence in commercial or financial
affairs more than the commodities from which they are derived, if not discounted,
by our present system; or whether discounted or not, with a system of sound currency,
where true value would be obtained at every exchange of the obligation. With a metallic
currency, or what amounts to the same thing, a system of certificates, coin being
retained against all issues, bills and notes might be discounted or transferred
any number of times without increasing, or in any degree affecting, the volume or
the value of the currency.
I am aware that I differ from other writers on this subject; but I cannot accept
any authority opposed to my own practical observation as a merchant, and my own
common sense, which teach me clearly that promissory notes are in their nature merchandise
more than currency. They make demand upon currency or money to transfer or pay for
them, precisely like the commodities from which they arise, with only a postponement
of time.
The credit system, unconnected with debt banking, is in no respect chargeable with
the financial revulsions that so frequently disturb the commerce and comfort of
the world, and most especially of this country. This suffers more than any other
country, and more frequently, from the excessive proportion of our banking to our
business, its excessive competition among 1,400 banks, and its irrepressible wild-cat
character. All the world over, the bankruptcies in trade, defalcations in pecuniary
trusts, commercial lying and cheating, are in proportion to the expansion of this
debt system of currency. Here, where we bank down to the denomination of the one
dollar note, and set all our property flying upon what Adam Smith calls the "dedalian
wings of paper money," the aggregation of commercial villainies, great and small,
has become immense. Failing to make money—the negative fact of not succeeding—is
immediately followed by the positive operation of making money by failing, which
is the tolerably well understood profession of some men, in which they succeed remarkably
well.
All this is inevitable from the operation of a system which alters the value of
money, presto, by the sudden and unavoidable change of policy by the banks,
from what is called accommodation to contraction—the application of the screw.
Many honest men are driven by this to subterfuges that their souls abhor, to secure
to their families for a brief period their daily bread. It is not always that they
recover the self-respect necessary to restore them to the true position of moral
honesty. I think the immoral influence of our banking system is a matter more deserving
attention than the pecuniary evils it brings upon the community, and these are quite
insufferable. Yet I do not quarrel with the banks for this. Public opinion, or rather
public ignorance, sustains the abnormal system, and the public is responsible for
its existence and its evils. Any business required by the public is a legitimate
object of money-making, and may and will be pursued by worthy men. The haberdasher
furnishes hoops and crinoline, and an amplitude of silk and satin outside drapery
for all this framework, which cause many a husband and father to wince at the foot
of the bill. Thus the handsomest thing in the world—a handsome woman—is converted
into the ugliest—an exaggerated demijohn. Shall I blame the haberdasher? Surely
not.
It was originally a trick in political economy of the Empress Eugenie to bring about
an increased demand for French goods. Who believes that she felt any delicacy about
carrying an heir to the Imperial throne under her belt, or wished to disguise the
appearance of it, as has been suggested? She was a shrewd political economist in
this measure. It succeeded. It is sustained here by the folly of our women, and
the neglect of our men in not resisting as an indignity this system of fencing off—this
being kept at an unnatural and unreasonable distance. Eugenie was the Bank of England
of this system of female folly and extravagance which has overtasked the silkworms
of France and China for several years past. I do not quarrel with the haberdasher
for turning it to profit, and making the most he can out of it.
Nor do I blame the banks. The public, having become possessed with the idea that
my note may be made money by the authority of a State Legislature, and being willing
to accept it as such, granting me security that they will provide the means of payment,
and pay me interest on it as money, is it to be supposed that I will hesitate to
avail myself of the privilege? The same conceit being entertained of the notes of
14,000 or 540,000 individuals—I have no conception how many directors and stockholders
of banks there are in this country—and the same privilege being granted to all these
people of taking interest on their bills payable, without lending a dime of value
for them—who doubts that they will issue them till they steep the community in debt
to the very lips? and how is such an ungainly power to be controlled? I answer by
public opinion—by throwing light upon the subject—and by the action of some good
men and capitalists who will establish a "BANK" that is not a "debt factory,"
and show practically to the self-deluded public the difference between them.
I think there is not one man in a hundred, borrowing currency of the bank, who does
not imagine he is borrowing money; nor one in a thousand, perhaps, who is aware
of the truth, that he borrows only his own credit in the debt of the bank, and that
he must furnish the bank the means to pay with, or its debt cannot be paid. Such
is the fact, however, with this debt principle in the currency: it is a mutual borrowing
of notes between the bank and its customers—mere kiting.
Now, if a third party gets possession of the liabilities of the bank, and demands
coin for them, or even the debtor himself before the maturity of his counter debt,
how can they be paid? They were in the first place obligations to pay dollars of
gold over and above any dollars in the country. They usurp and occupy the place
of so many real dollars among the people, which are thereby forced abroad, as I
have before stated; and such demands can be answered only in bankruptcy, because
prices, and consequently the means of payment, fall as soon as the demand takes
place; and they continue to fall in advance of the demand for money. Thus commodities
are forced upon a reluctant market; sellers become plenty and anxious, buyers few
and indifferent, and a general stampede of prices and general destruction succeed.
These are the sure effects of a bank contraction, more or less, according to its
extent; and it produces about five dollars of bankruptcy for every dollar of contraction,
depending upon the average number of sales of commodities between the producer and
consumer, which with a money currency would be made for cash. I think the transfers
of commodities from the raw material to the consumer average five that are made
by our system on credit.
I have but a few words to say of the "standard of value," having before explained
the matter in your pages. There is no such thing; for the value of money fluctuates
as it is thrown upon, or withdrawn from, the market, precisely like every other
commodity. Money forms the price of things, because it is the medium of exchange,
and may be called the measure of price, but it is not the measure of value.
Potatoes measure the value of dollars, as dollars measure the value of potatoes.
Reciprocally, every commodity measures the value of every other commodity in relation
to itself, money included, and money is but a commodity that does the same thing.
Add to, or deduct from, the supply of dollars in proportion to the demand, and more
or less dollars must be given in exchange for other things. Add to, or deduct from,
the supply of potatoes, and more or less potatoes must be given in exchange, by
the same rule. As gold increases in quantity, other things remaining as before,
it falls in value, and the dollar, which is but a component part of an ounce of
gold, falls with it. And an increase of bank dollars, they being used as equivalent
to gold dollars in the currency, depreciates the value of dollars and of gold also.
Conversely, the value of gold and of the currency is increased by the reduction
in quantity of gold or of convertible bank money. I need not enlarge upon this,
it being the principle of value that I demonstrated in a former communication, showing
the distinction between value and price.
From these considerations, the conclusion follows that there is a wide distinction
between the debt banking and credit systems: they are unnaturally connected—paired,
not matched—and the unholy alliance is constantly spawning a bastard progeny of
debt, called by the attractive name of "money," which is unmingled evil.
If the commercial world had been content with the natural volume of a metallic currency,
since the gold discovery in California, the late dire calamity in commercial affairs
would have been an impossibility, whatever superficial thinkers may say upon the
subject. There would have been a constant average advance of prices of two to three
per cent per annum, benefiting debtors by making it easy to pay debts, and causing
no loss but to those who are able to bear it—the capitalists with fixed-interest
investments—excepting only the limited class of small annuitants.
The law of value is as constant in its operation as the law of gravitation, and
must precipitate money, like water, from the higher to the lower level of volume,
however imperceptible the difference of level may be to ordinary observers. Had
we kept our money more valuable than the currencies of Europe, by abstaining from
adding bank dollars to our dollars of gold, we should have had continued prosperity,
all the more for the inflation in Europe, as long as Europe was not our debtor,
rendering us liable to lose by her defalcations.
It will be ascertained, at no distant period, that political economy, though obscured
at present by imperfect development, and consequent error in doctrine, is as exact
in its conclusions as the science of mathematics.
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