The instrument of association: a manual of currency

Front matter

UNIVERSITY OF

AT LOS ANGELES

THE

Contents

INTRODUCTION V

I. ITS NATURE AND USE IN THE ECONOMY OF

SOCIETY 15

Introduction

The author of this book has been impelled, by a sense of the deplorable and almost universal ignorance of the true theory of money, which prevails among- all classes of the community, — in Congress, in the Treasury Department of the government, in the various Chambers of Commerce throughout the country, and among the members of the press, — to demonstrate as briefly as possible, not his own opinion upon the subject, but the Law, as laid down by the most eminent writers on political economy, and as confirmed again and again by the history of modern nations. The consequences of this ignorance to our own country have been most ruinous, immeasurably evil, and well-nigh irremediable. The fiscal administration of the government since the close of the war, has been characterized by the most fatal ignorance and disregard of the laws of political economy, while the people are being rapidly impoverished, and sunk

VI INTRODUCTION.

deeper and deeper (government and people alike) into the bottomless abyss of bankruptcy. And yet, while many are sensible of this disastrous tendency, both the legislative and executive departments of the government seem to be utterly imbecile, and wholly incapable of agreeing upon any salutary measure of reform. Indeed, the whole cause of this unfortunate condition of affairs, seems to be entirely obscured from the vision of those whose high duty it is to provide for the general welfare of the country. The press, in the mean time, teems with chimeras of every conceivable shape, and pamphlets are multiplied upon pamphlets, till universal bewilderment seems to have settled, like a dense fog, upon and around the whole subject. The country is in a position similar to that at the close of the Revolution, and on the whole, perhaps, a worse condition than then. Since then, it has never been in a situation approaching that in which it now is. The evils of paper money — a revolutionary currency — are upon us, and the common fate of nations under the devastating influences of such a currency can only be averted by a careful consideration and observance of the laws of political economy. It has been the aim of the author to elucidate, as clearly as possible, the laws which

INTRODUCTION. vii

regulate the value of money, and to show how these natural, immutable laws have been violated ; and also, to show that it is owing to this audacious, reprehensible defiance and violation of these eternal laws, that such overshadowing calamities are threatening the destruction of public and private credit. The author has not attempted to propound any new doctrine. There is no new doctrine. The law as laid down by Adam Smith and affirmed by John Adams nearly a century ago, is still the same, — yesterday, to-day, and forever. The law is substantially this : that the value of the currency of a nation is limited by natural law ; that whenever this limit is exceeded, whether the currency be of coin or paper, it becomes depreciated ; that if the depreciated currency be of coin, the precious metals will be exported, till the volume of the currency is brought within the limit ; that if the depreciated currency be of paper, it must remain depreciated, and if it be considerably depreciated, it can never be disposed of except at its depreciated value, — that is to say, it cannot be restored to the true standard, by contraction or funding ; that if a paper currency be issued ad infinitum, the whole value of the issue can never exceed the natural limit. To state this law specifically, it viii INTRODUCTION.

will be sufficient to say, that if the natural limit of the currency be $500,000,000, and the nominal paper issues be $1,500,000,000, the paper dollars are not worth more than thirty-three and one third cents each. If the natural limit be $500,000,000, and it were possible to put $1,- 500,000,000 coin in use as currency, then the value of these dollars would only be equal to one third the value of the dollars that were in use previous to the increase ; that is to say, the price of all commodities would be three times as great. Price and value are quite distinct from each other. Price is the power to command money. Value is the power to command labor. The author has been enabled to ascertain the natural limit of the currency of this country, and to fix its true value, beyond controversy. He has also been enabled to arrive at the approximate nominal value of the irredeemable paper currency, and has demonstrated, incontestably, that the present value of our legal tender and national bank-notes is about thirty-three and one third cents each in the common currency of the world. He has shown that the fiscal embarrassments of the nation, as well as the almost frightful amount of our foreign indebtedness, are wholly due to the dogged persistence of the

INTRODUCTION. IX

Treasury Department, in maintaining the price of the legal tender notes above seventy cents, when their value is only about thirty-three and one third cents — in selling gold and tampering with the currency. Congress is obnoxious to censure in1 the highest degree, for conferring such corrupt and corrupting power upon the Minister of Finance, though he be the most pure and incorruptible of men. If pure-minded, he is almost as ignorant as Congress, and has wielded a terribly destructive power, without hindrance, and with the most disastrous results. Congress, in this respect, it cannot be denied, has manifested utter incapacity for good, and capacity only for evil. The Administration is, perhaps, equally to blame ; for the Finance Minister should, by virtue of his office, be able to inform Congress upon the true principles of political economy. But, unfortunately, fitness for office seems to work a disqualification therefor, in this country. Not only has this fatal policy of selling gold been persisted in, but the equally fatal dogma of contraction has been pursued with a relentlessness of purpose which deserves the execrations of every citizen. History furnishes no instance where an irredeemable paper currency, — revolutionary currency,

INTRODUCTION.

or bills of credit, — when once issued to great excess, has ever been considerably appreciated in value ; and history never will furnish such an instance, for the simple reason that it is impossible. The very attempt to do so necessitates increased issues, because it destroys the revenues of the government.

The attempt has been pursued with greater obstinacy and to a greater extent, perhaps, in this country than ever before. The currency cannot be contracted, still less can it be funded. The only method of disposing of this currency is such as has been employed by other nations, and which is pointed out in the text. The maladministration of the Treasury Department has been the greatest tax upon the people, but there are others equally unjust. The national bank circulation is a tax upon the people to the extent of about fifteen millions of dollars per annum, and. unfortunately, the system, while ostensibly under the control of Congress, has or seems to have its attorneys in both legislative branches, and in the various departments of the Treasury. It is not fit that the people should be compelled to bear this incubus longer. The dominant party seems to be without the moral courage to resist it, if, indeed, the party itself be not within its

INTRODUCTION. XI

stern control. An enormous income tax, without color of legality under the fundamental law, endurable during the war, but intolerable now that the war is ended, has pressed heavily upon the middling classes, and in many cases encroached upon their capital. The excise on distilled spirits, one of the most just and least oppressive of taxes, seems to be appropriated by the vultures who hover about and pollute all departments of the government, and sit at the receipt of customs. Preposterous imposts have been levied upon foreign products, with the futile design of shutting them out from ruinous competition with home industry ; but the money king, whom Congress has enthroned above the law, and the smuggler, laugh them to scorn. It is not easy to contemplate these things with composure, nor is it agreeable to dwell upon the criminal neglect of the interests of the country, when one's political sympathies are drawn towards the dominant party. But the country has stronger and paramount claims, even if each person's individual interest did not constrain him to rebuke those, who, intoxicated with power, apparently care for little else than its retention. It is true that a factious opposition has been presented to the legislative power, but

Xll INTRODUCTION.

it cannot be concealed that the dominant party has retained a controlling1 power of the machinery of legislation, and, instead of a well-devised system of taxation, we seem to have an artful scheme of spoliation. The author has discussed the question of subjecting the capital invested in government bonds to taxation with entire freedom, as he was in duty bound to do. Whoever has read history attentively, will perceive the danger likely to arrive from this exemption of accumulated property of any description from taxation, and throwing the burden upon production. The history of the French Revolution is most instructive in this particular. It was the refusal of the nobles and privileged classes in France to submit to taxation, and to acquiesce in the wholesome reforms proposed by Turgot, and afterwards by Necker, which drove the latter repeatedly from office, necessitated the issue of paper money, brought on the Reign of Terror, and culminated in the ascendancy of the military power. The frightful sequence of events in France could not have taken place, had the suffrage been general and impartial, and therefore, such calamities are impossible here. The danger is not that injustice will be done to the tax-payers in this country, but that the at-

INTRODUCTION. Xlll

tempt to commit a wrong upon them, either in exempting bonds from taxation or in settling the public debt by a standard thrice as high as that by which it was contracted, will react with fatal injustice to the public creditor, and be prejudicial in the last degree to the permanence of the Union. Especially has it been the desire of the author to embody the elementary principles of currency in the smallest possible compass, since it is well-nigh impossible to induce the general community to undertake the careful perusal of an elaborate treatise on political economy. He has drawn freely from the fountains of knowledge and the history of human experience. He has commented with freedom upon the executive and legislative departments of the government, as well as upon the political party which is in the ascendant, and he conceives it was his right and duty so to do. He has done this with none other than kind feelings, so far as any persons in either department of the government are known to him. He has not sought popularity at the expense of truth, but rather incurred the risk of censure for the sake of justice. He has endeavored to submit to the guidance of his instincts, which, he hopes, are patriotic, honest, and republican. So far as he may have advanced

XIV INTEODUCTION.

principles of political economy, he invites intelligent criticism. So far as he may be judged in matters of opinion, or in the manner of this book, he invokes fairness only.

GEO. A. POTTER.

Brooklyn, June 4, 1868.

THE

INSTRUMENT OF ASSOCIATION.

I. Its Nature And Use In The Economy Of Society

rnHE credit of a state depends on the proportion of its revenue to its expense, and the ease and satisfaction with which the necessary taxation is borne by the people.1 The revenue of a state depends entirely upon the industry of the people, for labor is the only source of wealth. The industry of the people consists in utilizing the matter already created by God. Man produces nothing but utility.2 The industry of man takes three general but different forms — transmutation, transformation, transportation.3 Trans- & mutation is the appropriation and change of matter by the agriculturist, miner, chemist, hunter, fisherman, and so on. Transformation is the change of form wrought by the manufacturer, which branch of human industry is susceptible of the greatest extension of the prini Burke. 2 McCulloch and Mill. 3 Walker.

ciple of the division of labor.1 The greater the extent of the division of labor, the greater its efficiency in the aggregate ; hence, manufacturing industry is the most profitable for any nation, so long as it can obtain a market for its products at home or abroad. Transportation is the change of place wrought by the merchant, the seaman, and the carrying and distributing trade generally ; in a word, it is commerce. This branch of industry is also susceptible, in a great degree, of the application of the principle of the division of labor, and includes bankers, brokers, and dealers in money generally, so far as they help to utilize capital. These are the producing classes, and so far as the value of their production exceeds the value of their consumption, so far have they increased the fixed or circulating capital of the country. The prosperity of each class is intimately associated with, and dependent on, the prosperitv of the other two. If from any cause the prosperity of manufacturing industry declines, agriculture and commerce will also decline.2 The one grand connecting link between these three general branches of industry, in all their multifarious subdivisions,

1 Progress of the Mechanical Arts. A Lecture before the Boston Mechanics' Institution. 1828. Webster.

2 Webster.

— the one instrument of association? — is money and its substitutes, comprehended in the general term — currency.

It is obvious that the material welfare of a state depends upon the perfect adaptability of the instrument of association. And in order to be perfectly adapted to its functions, it must promote a rapid societary circulation? By a rapid societary circulation, is meant rapid production, and interchange, and consumption, of the products of labor. The more rapid the circulation, the more perfect the power of association, the greater the power to support taxation, the greater the economy of labor, the more advanced the civilization of the community, the greater the extent of the division of labor, and the more secure the democratic form of government and the liberty of the people.3 The instrument of association then must not be unwieldy, otherwise the circulation will be sluggish ; if the currency is excessive, it begins to lose the character of a medium and becomes itself the thing to be

1 I am indebted to Mr. Carey for this term. No other language so completely embodies the idea developed in this book as to the functions of the currency. Hence the appropriateness of the title.

2 Carey.

circulated. It must be elastic, otherwise values and prices will be constantly fluctuating ; producers will stop producing and begin speculating, and the demoralization and poverty of the people will ensue. It must possess the element of value in itself, or by proxy, in order to command value at all times. It must be as inexpensive as possible, otherwise it will be a burden on the people. Finally, it must be self-regulating and secured against the interference of empirics, whether in the executive or legislative departments of the government.1 In order to illustrate, by analogy, the economy of a rapid circulation, let us suppose a given quantity of freight to be transported from one point to another. This freight, we will suppose, can be transported by one hundred cars making one trip per day, or it can be transported by ten cars making ten trips per day. Now it is obvious that when the ten cars only are employed as the instrument of commerce, the more rapid will be the circulation, and the less expensive in point of cost will be that instrument of commerce. Let us also suppose that the use of a thousand cars every day to transport this freight is made compulsory ;

1 " He who tampers with the currency, robs labor of its bread." — Webster.

ITS N A TUBE AND USE IN SOCIETY. 19

then, obviously, the instrument of commerce -is not only very expensive, but each car will only be a tenth part loaded. In these supposed cases the utility of the ten cars, and the hundred cars, and the thousand cars is the same. Their respective values as instruments of commerce are equal. So it is with the currency of a nation ; the momentum * (mass multiplied by velocity), or utility, being1 the same when the volume of the currency is small and the circulation rapid, as when the volume is large and the circulation sluggish.2 Hence, the smaller the volume of the currency of a nation, the more rapid the circulation, and the greater the material prosperity of such nation.3 The minimum as well as the maximum of the volume of the currency of a nation, however, is fixed by a principle which will be laid down hereafter. The elasticity of the currency of a nation depends upon its material, and whether there be any use for such material within or without such nation, other than for currency. If the currency be of irredeemable paper, it will have no elasticity, because its

1 Bowen and Perry. 2 Mill.

3 Mr. Carey contradicts this proposition, but Smith, Hume, and nearly all the British economists, as well as Say, Bastiat, and Chevalier, sustain it. Bowen, Walker, and Perry also substantially admit it.

volume remaining" the same, the constant ebbing and flowing of the tide of commerce will fall as upon the sea-shore, marking a depreciation, or it will rise as upon the sea-shore, marking an appreciation of the currency. If the currency be of inherent or representative value, it will go abroad or be consumed when in excess ; when deficient, it will be increased by accretions from abroad, or by production. The ceaseless operation of the eternal law of supply and demand, which acts on everything of value, whether movable or immovable, will cause a currency of value to remain, or go where it will command the greajtest value of other commodities in exchange. It is rather a truism than a similitude to say that the laws of trade will preserve a perfect adjustment of a currency of value, just as the law of gravitation preserves a perfect level of the sea. In saying that the currency must possess the element of value in itself, it is intended to use the word value in the sense given to it by Bastiat ; that is to say, it must be the embodiment of human service or labor already performed, or rather it must embody the power to command service or labor. It doubtless seems paradoxical to assert that a metallic currency is comparatively inexpensive, but experience has proved it to be the cheapest currency that human ingenuity can devise. Its utmost cost is the loss of interest, and the insignificant loss by abrasion. It is the cheapest because it is the most efficient ; 1 but if we consider the immense loss resulting1 to private individuals and corporations, and to the industrial classes and capitalists, from the frequent expansions and revulsions of a paper currency, the absurdity of the pretense that such a currency is cheap, will be readily perceived. The Secretary of the Treasury, in 184*1, in answer to a request of Congress, estimated that up to that time the losses sustained by the government and the people by allowing banks of issue, was $380,943,-

497-2 ~

Having described the essentials of a perfect currency or instrument of association, it only remains to say that of all materials known to civilized man, the precious metals alone possess all the indispensable qualities of a perfect currency. It is the opinion of many able writers, that the precious metals were designed by the Creator to be the instrument of association. It is no figure of speech to say (and I speak it with the utmost reverence), in the language of a i Walker. 2 ibid.

stump-orator, that gold and silver is the money of God and of democracy.1 The pernicious doctrine of Adam Smith, that paper could be advantageously substituted for a metallic circulation, thus displacing the coin with an instrument less costly, has been abundantly refuted by experience, and it may well be doubted whether he would not be an implacable enemy of paper money in any form, were he now living. It should be borne in mind that when Smith wrote, the science of political economy was in its infancy ; indeed, he has been regarded as its father ; moreover, political economy is an experimental science ; it assumes nothing but the universality of human selfishness, which is a law of human nature.2 But if history has proved anything, it has proved that a paper currency intended to be convertible at all times, under any circumstances, into gold at the will of the holder, is a chimera, and nowhere more so, than under a popular government. Political economy, therefore, being an experimental science, it must be conceded that on the facts as they are in history, a paper currency cannot stand the test to which that science subjects all theories, before admitting them to be sound. 1 Speech of S. S. Cox. 2 Bowen.

Adam Smith, however, entertained a wholesome contempt for circulating notes of small denomination, for he says, " Where the issuing of bank-notes for such very small sums is allowed, and commonly practiced, many mean people are both enabled and encouraged to become bankers. A person whose promissory note for five pounds, or even twenty shillings, would be rejected by everybody, will get it to be received without scruple when it is issued for so small a sum as a sixpence. But the frequent bankruptcies to which such beggarly bankers must be liable, may occasion a very considerable inconveniency, and sometimes a very great calamity to many poor people who had received their notes in payment. It were better, perhaps, that no bank-notes were issued in any part of the kingdom for a smaller sum than five pounds." Speaking of the lawfulness of restricting the issue of circulating notes, Dr. Smith further says : " Such regulations may no doubt be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the whole society, are, and ought to be, restrained by the laws of all governments ; of the most free, as well as the most despotical. The

24 THE INSTEUMENT OF ASSOCIATION:

obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed." The arguments of those who advocate paper money, do not differ widely from those of John Law, who held " that money owes its value to the public confidence ; and that paper, or anything else, may answer this purpose as well as the precious metals (the first, as well as the last, he regarded as the mere signs of wealth) ; that land was a better commodity for money than silver, and that the currency of a country might be increased to the whole value of its lands ; that the effect of such an increase would be not depreciation, but merely a lowering of interest, by which trade would be encouraged and wealth augmented." * Notwithstanding that such a fallacious doctrine has been again and again exploded, it seems to find new advocates in every generation. These advocates do not, perhaps, claim that land is a suitable basis for a circulation, but they do claim that interest bearing bonds are a safe basis for circulation, which is equally a heresy. Government bonds are not money, and as a basis of circula-

1 The Mississippi Scheme in France. — Tucker.

tion, " the mischief is, that they are least available when they are most wanted ; the verycauses which might prevent the hanks from redeeming their issues promptly, would cause a fall in the value of the stocks and mortgages on the ultimate security of which their notes have been issued." 1 A circulation based on government bonds is a circulation based on debt, and not on value, than which, nothing can be conceived more unsubstantial. A circulation based on staple merchandise of general consumption throughout the world, and imperishable in its own nature, such as cotton, valued at about the cost of production in the chief producing country, and rendered secure against damage by fire and water, would be a comparatively sound currency, but much more expensive than a circulation based on gold. With such a currency, the element of value would be ever present ; but it is precisely this evasion of value and the substitution of debt in its place, which is always sought; this foisting upon the people as money that which, when put to the crucial test, has always been found to be its counterfeit and not its representative, which is always persisted in ; it is this insufferable fraud on the people, originally 1 Gouge, quoted by Bowen.

granted as a privilege, but now claimed as a right, which has been the abundant cause of so much loss and distress in the mercantile community, so much discord between capital and labor, such acrimonious strife between free-traders and protectionists, and the remote cause of civil war in the country. If the instrument of association be imperfect, the power of association becomes weakened, and the danger of dissociation is always impending. Men are too apt to regard this Union as the result of extraordinary abnegation on the part of our fathers, with a view to demonstrate, in the uncontaminated society of a new world, a liberal principle of political philosophy which had hitherto failed elsewhere. That the framers of the Constitution, especially Washington who presided at the convention, were animated by such lofty sentiments, is not doubted ; but that the States and people at large participated in, and were influenced by patriotic considerations to any important degree, neither history nor a knowledge of the springs of human action will permit us to believe. The recorded failure of the Confederation to promote the general prosperity, was regarded as a proof of what the exigencies of the Union demanded in a general government.1

1 History of the Constitution, Curtis.

That the evils of paper money were generally considered to be the parent of the commercial distress, is perfectly clear. " One of the principal causes which led to the experiment of making- a national government with power to prevent such abuses, had been the frauds and injustice perpetrated by the States, in their issues of paper money ; and there was at this very time a loud and general outcry against the conduct of the people of Rhode Island, who had kept themselves aloof from the national convention, for the express purpose, among others, of retaining to themselves the power to issue such a currency." * But the exigencies of the Union demanded that no State should " make anything but gold and silver coin a tender in payment of debts," 2 and so the prohibition was incorporated into the fundamental law.3 " Whatever we may think of it now, the Constitution had its immediate origin in the conviction of the necessity for this uniformity or identity in commercial regulations. The whole history of the country, of every year and every month, from the close of the war of the Revolution to 17§9, proves this. Over whatever other interests it was made

1 History of the Constitution, Curtis. 2 Ibid.

3 Constitution, art. 1, sec. 10.

to extend, and whatever other biessings it now confers, or hereafter may confer, on the millions of free citizens who do or shall live under its protection ; even though in time to come, it shall raise a pyramid of power and grandeur, whose apex should look down on the loftiest political structures of other nations and other ages, it will yet be true, that it was itself the child of pressing commercial necessity."1 It is readily conceded that slavery was the immediate cause of the late civil war, but slavery grew and flourished under a condition of society that was wholly due to the inefficacy of the instrument of association. This will be shown hereafter.2

1 Webster. 2 Post, pp. 101-104.

n.

OF ITS COMPONENT PARTS.

^T^HE circulating medium of a country, whether of notes or coin, is commonly supposed to form the entire currency thereof, whereas, only a very small portion of the commercial exchanges is effected by circulating notes or coin. The greater portion of our commercial exchanges are effected by bank deposits, represented and transferred by means of checks. The magnitude of the exchanges effected at the clearing house in New York, without the intervention of circulating notes, is very great. The larger proportion of customs duties are paid by coin certificates of deposit, and before the use of these, certified gold checks were the common means of effecting exchanges in a gold currency. The mercantile classes seldom use circulating notes in payments of one hundred dollars or more. In the seventeenth century, the commercial currency of some of the smaller European states consisted entirely of deposits.1 The banks of Venice, Genoa, Amster-

1 Smith.

dam, Hamburg, and Nuremburg, held deposits of bullion, which was considered the standard money, and was transferred by means of receipts which were in the nature of certificates of deposit. This practice arose in consequence of the coin of those states having become degraded by clipping, and by the admixture of foreign coin in the circulation, so that bank money commonly bore an agio ; that of the Bank of Hamburg was about fourteen per cent, above the degraded coin. For the purpose of conveniently elucidating this subject, I propose to draw a distinction between the retail or trading currency, and the wholesale or commercial currency, — a distinction between trade and commerce without a lexical difference perhaps, and arbitrary withal, but yet essential to a clear presentation of the subject. Some writers consider that bills of exchange form a part of the currency, but the proposition cannot be admitted. Suppose A in Chicago, by means of his own check, purchases of the bank a bill of exchange on New York. What is the result ? A has reduced his deposit account, the bank has reduced its liability to A, and the bank in New York has reduced it liability to the bank in Chicago by reducing its balance, out of which the bill of exchange has been paid and passed out of existence ; and the party in New York, from whom the bill of exchange was redeemed, has increased his deposit account. The bill of exchange, in this instance, was merely the agency by which a deposit was transferred from A in Chicago to the payee in New York.