Organization of Debt Into Currency and Other Papers

Little is known of Charles Holt Carroll (1799-1890), the author of the thirty-six essays reprinted in this book. In the list of contributors in Hunt’s Merchants’ Magazine, where many of these essays appeared, Carroll is described as “A Merchant of Massachusetts.” There are, of course, such scattered bits of information in business directories and newspapers as may be found for many nineteenth-century businessmen, but even when these are combined with the remarks he drops about himself in his essays, only a shadowy figure of a man emerges. One would like to know more about this merchant who wrote so vigorously on the currency question.

Carroll seems to have had no close associates. Possibly he was regarded as eccentric. In any event no one troubled to write his biography, and the members of his family did not bother to preserve his personal papers. Despite his claim to having discovered no less than three new truths as to the effects of paper money in an essay written in 1859, those around him evidently did not think he would achieve renown. It now appears that Carroll might have made broader claims, for in the aggregate his writings contain an abundance of interesting ideas.

Although Carroll insists upon a fresh approach to the currency problem, he is emphatic that his findings are based on accepted economic doctrine. He pauses frequently to praise the developing science of political economy, whose laws he insists are universally valid. He appears to have been a moderately careful student of Smith and Mill, and he was strongly, if not violently, anti-interventionist and antiprotectionist. On currency matters he was not a slavish follower of classical thought. Rather, he pursued his own path, rejecting, for example, Smith’s dictum that an economy is realized by substituting paper money for the precious metals. He also quarrels with Mill’s view that all forms of credit have the same effect. Yet in fundamental matters, such as the nature and source of value, Carroll adheres to orthodox teaching. Carroll’s outright rejection of the ideas of Henry C. Carey is indicative of his basic approach.

Possibly he went to Baltimore as a youth, but there is no direct evidence of his presence there until 1829. A number of young men named Charles Carroll attended St. Mary’s College in Baltimore during the years when Carroll would have been of student age. It could hardly have been he who signed “Charles H. Carroll” in the Degree Book of St. Mary’s College, July 2, 1813. That would mean that he earned the degree of A.B. when but thirteen years old. But when Carroll remarks in one of his many diatribes against the Bank of England that it was founded by the Protestants as part of the effort to displace the Stuarts, he may be revealing that he learned his history from a Roman Catholic teacher, as he certainly would have if he had been of the Maryland Carrolls. This, however, belies the Protestant background of his parents. Nor does it harmonize with the fact that Carroll’s funeral was conducted by a Unitarian clergyman. In any event, Carroll’s style of writing suggests that he had been trained under firm-handed schoolmasters. His thought is clear, his ideas are well organized, and his language is forceful. There are frequent classical allusions in his essays, but there is little of the excessively flowery style of the period. Although his eldest son attended Harvard, there is no record that he himself did.

Carroll, of course, may have been self-educated. If so, this might account for his frequently expressed scorn for closeted scholars. He says that only men who have had practical experience are qualified to speak on the question of the currency. One cannot be sure what meaning attaches to the aspersions he casts on scholarly deduction. While he does insist on first-hand knowledge of currency matters, he does not deny himself acquaintance with the writings of the political economists. At every opportunity he bolsters his views by appealing to their authority, although he does not hesitate to challenge them on doctrinal points.

This is about all that can be said about Carroll’s life. It helps only slightly in understanding Carroll’s ideas. Yet there is some value in knowing that Carroll was neither a political figure nor a banker nor even a college professor.

The accessibility of the appraisals of Carroll’s early writings by Mints and Miller makes unnecessary a detailed review of the essays written before the Civil War. The resumé of his writings that follows is intended only to direct attention to some of the more interesting of Carroll’s ideas.

What he had to say is still of interest despite changes in the economic environment. In emphasizing the significance of bank deposits, he was well in advance of his contemporaries. Although he was not the first to perceive that bank demand deposits are money, he made clearer than almost anyone else the fact that these deposits arise from the making of bank loans. In observing that bank notes usually come into use through the withdrawal of previously created deposits, Carroll seems to have anticipated the modern view that monetary control should be directed at deposits rather than at bank notes. Indeed, Carroll makes this point explicitly. Carroll is most eloquent in describing the process of deflation and in pointing out its potentialities for destroying the fabric of business. He shows with vigor and clarity how universal ruin may threaten an economic system where the circulating medium consists of bank debts resting on short-term business indebtedness to banks. It is here that Carroll shows that he fully understood the working of the financial mechanism upon which we still depend.

Although almost all writers of the day laid the blame for panics on the banking system, few saw with Carroll that monetary expansion and contraction were the basic cause. John Stuart Mill’s influence was very great, and Mill espoused the Banking School view that the banks were essentially passive. Only a person of Carroll’s independence of mind would dare to question Mill’s doctrine that it was the use of credit for so-called “speculative purposes” that brought on collapse and panic. Carroll emphatically denied that limiting bank lending to “legitimate” uses would prevent crises. His position was that market forces would serve to allocate capital appropriately among alternative uses provided that the linkage between money-lending and money-creating were severed. He opposed the regulation of bank lending or, for that matter, any sort of lending. Carroll was thus one of the few nineteenth-century economic spokesmen who wrote meaningfully on competition in banking.

Down to the time of the Civil War, Carroll was hopeful that improvement in monetary affairs could be achieved by persuading the State legislatures to abandon the chartering of banks. He makes abundantly clear his doubts that the States actually possess this power despite the Supreme Court’s having ruled that State bank notes are not bills of credit and thus do not fall under the Constitutional ban on state issue of money.

Carroll’s views on monetary reform underwent modification in consequence of the financial changes wrought by the Civil War. His basic tenets, opposition to bank-debt currency and to protectionism, remained unaltered, but in presenting in 1863 an outline of an ideal monetary system, he developed some novel ideas. He said that only full-bodied coins and fully backed coin certificates should be permitted to circulate. Bank-debt currency should be eliminated entirely. For the accommodation of persons having small payments to make at a distance, Carroll suggested that the postmasters be authorized to sell drafts on the subtreasuries. Postal money orders were in fact introduced about a year after this article appeared, but Carroll had been talking about such drafts since 1858. The most interesting feature of his drastic reform plan was the proposal to eliminate the dollar as the monetary unit. He wanted to replace it with the troy ounce. Carroll reasoned that this change was required to destroy the illusion that it is possible to create dollars out of paper and give them value by some legerdemain. To him the only money that genuinely possessed value was specie. That alone had productive effort embodied in it to the same extent as the things for which money is exchanged. Carroll was firmly convinced that the basic monetary fallacies, such as the idea that paper money is wealth and that interest can be lowered by printing money, have their origin in the fact that the monetary unit has become separated from the monetary substance.

The proposed reform was to return to the monetary practice of an earlier time when the monetary unit was actually a unit of weight of precious metal. The troy ounce seemed to Carroll to be the logical unit to replace the dollar, which he held was fundamentally defective in that it did not even represent in the mind of the public any specific amount of specie. In subsequent papers Carroll did not urge this particular reform, but he continued to insist that the only form of nonmetallic currency that should be tolerated was the fully backed coin certificate issued by the government itself. As might be expected, he approved of the gold certificate that first appeared during the Civil War, although this new form of currency actually was not in widespread use because it commanded a premium over the greenback.

Carroll never tired of inveighing against “paper money,” which to him meant any kind of circulating media not backed 100% by specie. One of his arguments against paper money is that the holder of a note in effect gives up command over capital to the issuer and thus really makes an interest-free loan. He applies this idea to the Civil War greenbacks, showing how their issue enabled the government to obtain resources to carry on the war. He also applies the same reasoning to bank deposits, insisting that it is the bank’s depositors that furnish capital to the bank rather than the bank that supplies capital to its customers. While Carroll did not press on to develop the idea of forced saving, the distinction that he attempted to make between capital in money form and in the form of wealth is central to that concept.

In one of the essays published during the Civil War Carroll does concede that if paper money is to be used at all, it should be issued by the government and not by banks. Despite this grudging concession, at the war’s end he urged the prompt resumption of specie payments. Fearful of the effects of a drastic fall in prices, which he noted Ricardo had failed to foresee after the Napoleonic Wars, and which many in this country felt must come if resumption was to become a reality, Carroll toyed with the idea of adopting a dual currency system. Under his proposal all existing contracts and obligations would be satisfied in greenbacks, but all new undertakings would be entered into on a specie basis. Although his arguments against deflation are persuasive, he fails to make clear how the two currencies could circulate side by side. In subsequent discussion of resumption he abandons the idea and takes the position that the stock of money is in excess of the nation’s needs and therefore might safely be contracted without inducing the drastic fall in prices that he had feared. It is here that he returns to the idea of a fixed per capita stock of money that he had advanced in his early writings.

Basically Carroll was a metallist rather than a nominalist in his approach to the nature of money. He regarded anything but metallic money as a fiction, leading inevitably to disaster. Contrary to Knapp’s dictum that money is a creature of the state, Carroll’s view is that money arises from exchange between producers and gets its purchasing power and its capacity to circulate from the commodity out of which it is made. Like the classicists, he held that value is derived ultimately from labor. Therefore, only a commodity money could embody value in the sense of containing within itself the crystallized effort of past production. Carroll does not deny that debt money can circulate, but he insists that inflation and inevitable collapse will follow any attempt to substitute inherently valueless tokens for metallic money. Carroll, however, does not fall into the error that has commonly been made by metallists of holding that the precious metals are constant in value. In discussing the outpouring of gold from California, he makes clear that any increase in the ratio of gold to other commodities must lower the value of gold. At heart he was a quantity theorist, if of a low order. In this he differs from many who have insisted on a gold currency. Contrary to what might be expected, he does not make the value of money turn about the cost of producing gold.

Carroll was not a sophisticated quantity theorist. He recognized the V and the T terms of the equation of exchange, but he made no effort to go beyond Mill’s simple statement of their nature. He did, however, set forth some interesting views about the rate of flow of currency in the economic system. He makes much of the idea of an invariable normal relationship of 1 to 25 between total currency and total wealth or property, terms which are used by him without distinction. The basic idea he attributes to John C. Calhoun. Although Carroll makes use of this idea repeatedly, he never explains why this ratio exists. To him it is a simple empirically determined relationship. He also held that a similar normal relationship of 1 to 10 holds between total currency and total circulating capital. This seems to have been of his own invention. Again he fails to make clear why this ratio is constant. Carroll does not deny that there are departures from these normal values, but he insists that they are useful empirically to determine if the currency is in excess. Since he explicitly recognizes the phenomenon of hoarding, it is clear, at least by inference, that he recognized that velocity is a variable. But Carroll can hardly be said to have contributed to the understanding of the phenomenon of velocity.

The three words, “price without value,” which Carroll never tires of repeating are the key to his thought. His central idea was that currency generated by bank lending pours forth only to drive up prices without creating additional value. This he found philosophically repugnant because it involved a fiction; more important, he held that the rise in prices was only temporary and inevitably culminated in collapse and wholesale bankruptcy. When the banks attempt to collect the loans that generated the currency that drove up prices, debts contracted when prices were high would be defaulted, and ruin would descend. The burden would be heaviest upon the merchant group, because they are accustomed to financing themselves by borrowing at banks. Carroll describes in great detail the effects of alternately expanding and contracting the currency, pointing out the effects of price changes on the distribution of wealth and income and also condemning the transfers of property that accompany bankruptcy. He observes that creditors are frequently defrauded by bankrupts, and this type of loss must be added to the losses assignable to changes in the value of money.

A further consequence of debt-currency expansion is to check exports by raising the prices of domestically produced goods to a level where foreigners find them unattractive. Imports flow in despite the tariff wall erected to protect domestic industry, and specie flows out. The effort to strengthen the nation’s currency through adopting a policy of protectionism consequently produces precisely the opposite of the intended effect. Moreover, the monetary expansion that accompanies the early phase of the sequence of events serves only to weaken the credit structure. Collapse with an inevitable wave of bankruptcies follows, even if with a lag, each expansion in the currency. This is the theme of the first essay, and it recurs again and again.

Carroll’s interest in exchange rate theory grows in part out of his antiprotectionism. In several of the papers written after the Civil War he attempts to show that the nation need not rely on a high tariff to build up its gold holdings preparatory to resumption of specie payments. This leads him to comment on the revenue aspects of the tariff. After denouncing the tariff because it interferes with economic specialization, he undertakes to develop the argument that raising revenue through import duties results in allocating the burden of taxation inequitably. As in his discussion of specie flows, his analysis runs in terms of the shifts in relative prices required to achieve a new equilibrium once something has occurred to change an existing pattern of resource utilization. Carroll unquestionably saw clearly the distinction between general price changes and relative price changes, and he certainly understood the importance of relative price movements in shifting from one equilibrium to another.

Carroll was tireless in blaming the Bank of England for introducing fractional-reserve banking, although he is careful to point out that at first the practice was restricted to note issue. In no less than twenty of his essays Carroll has occasion to speak harshly of the Bank of England for the part it played in demonstrating to the world that banks may operate with fractional reserves. In one place, as was noted earlier, he uses as the basis of his criticism the Protestant origins of the Bank, but ordinarily he attempts to rest his case on analytical reasoning. Carroll urges that there is no necessary reason for America to copy slavishly European financial practices, which on occasion he holds as unacceptable as European political practices. Here his American patriotism comes to the surface. Carroll was one of that group of midnineteenth-century Americans who saw a vision of a genuinely new social order. But Carroll was not above using European examples to bolster his case when that was convenient. The final essay, for example, lauds France for sticking to the use of gold coins as a medium of exchange. He was not always consistent, but few reform-minded persons are.

On two matters of banking theory which were widely discussed in the nineteenth century and which are still of interest, Carroll expressed himself with characteristic originality as opposed to the dominant view of his day. He ridiculed the idea that real bills are preferable to other kinds of bank assets, and he rejected the notion that elasticity in the currency is necessary. On both these matters the discussion is brief, but the clarity with which the subject is treated leaves no doubt that Carroll has a just claim to recognition. Here, as in his observation that a war debt’s burden falls on the present generation, the treatment is such as to indicate that Carroll could see beneath the veil of money.

Despite the apparent neglect of Carroll’s ideas by his contemporaries, they are important enough to justify their being disinterred from the yellowed pages of the journals where the essays first appeared. Carroll’s proposals for monetary and banking reform may have no greater chance of adoption now than when he wrote, but no one can deny that the financial problems with which he concerned himself are still unresolved.

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One essay, “The Monetary Unit and Financial Economy,” has been included in this book even though it lacks Carroll’s signature. The paper that preceded it foretold its coming, and its content leaves slight doubt that it is from the pen of Charles Holt Carroll. Occasional changes of spelling and punctuation have been made to facilitate reading. Otherwise the text is unchanged.

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To a number of people thanks are due for assistance in preparing this collection of the writings of Charles Holt Carroll. Deserving particular mention are: Mrs. Catherine J. Pierce, Duke University Library; Miss Rosalie A. Lang, Boston Public Library; and Miss Elizabeth C. Litsinger, Enoch Pratt Free Library, Baltimore. Valuable assistance was also rendered by members of the staff of the Library of Congress and of the New York Public Library. My wife, Glenna Sherman Simmons, assisted me in my efforts to trace Carroll’s family background. Mr. Richard H. Nolan of Boston deserves special mention for his assistance in searching official records. My heaviest obligation, however, is to my colleague, Professor Robert S. Smith of Duke University, who provided wise counsel.

EDWARD C. SIMMONS

Durham, North Carolina

October 20, 1961