Capital and Currency

CAPITAL AND CURRENCY. Our other resource when straitened for capital, the one to which we had betaken ourselves before, was now also employed—a multiplication of * He said that the amount was not greater in 1853 than in 1829.

HISTORY OF AMERICAN CURRENCY. I;I the paper representatives of capital. Capital is that portion of all the previous product of a nation which at any given time is available for new production. This will be a certain amount of tilled land, houses, buildings, stock, tools, food, clothing, roads, bridges, etc., etc., which have been made and are ready for use in producing, transporting, and exchanging new products. These things are all the product of labor, and require time for their production. Nothing but labor spent upon them can produce others, and time is required for this labor to issue in new and increased possessions. Currency only serves to distribute this capital into the proper hands for its most efficient application to new production. Banks, it must be repeated, only facilitate the transfer of capital from hands where it is idle, or is distributed in too small quantities, into hands by which it will be usefully employed, being collected in the necessary amounts. Currency, therefore, is not capital, any more thin ships are freight; it is only a labor-saving machine for making easy transfers. Banks do not create wealth, they only facilitate its creation by distrib172 HISTORY OF AMERICAN CURRENCY.

uting capital in the most advantageous manner. If, therefore, currency is multiplied, it is a. delusion to suppose that capital is multiplied, or, if "money is plenty," by artificial increase of its representa-4 tives, it is only like increasing the number of tickets which give a claim on a specific stock of goods—the ticket holders would be deceived and could, in the end, only get a proportional dividend out of the stock. If banks not only lend capital but also lend " coined credit," some time or other a liquidation must come, there must be an effort to touch the capital which the notes pretend to convey. Then it is found that they represent nothing ; then " credit breaks down," and there must be a settlement, a liquidation, a dividend, and a new start. We do not get away from the facts at all. The real amount of capital which we possess is divided up, and we have to make up our minds that we possess only 50 or 75 per cent, of what we thought we possessed.

We put smaller figures for everything, and reconcile ourselves to smaller hopes, but the experience is soon forgotten, and the old process of inflation and delusion begins again.

HISTORY OF AMERICAN CURRENCY. Some have wondered that we go on in this way with a grand crisis only once in twenty years, wrhile the oldest and most prudent nations have one every ten years. The explanation no doubt is, that the future which we discount so freely honors our drafts on it. Six months' restraint avails to set us right, and our credit creations, as anticipations of the future product of labor, become solidified. So long as we understand that we have anticipated future production, and must apply that production to make good the anticipations, we run on without very great risk, but whenever we lose our heads in the intoxication of our own achievements, look on the credit anticipations, which are only fictitious capital, as if they were real, use them as already earned, build other credit expansions upon them, do away with our value money and export it to purchase articles of luxurious consumption, then we bring a convulsion and a downfall. The mistake is then realized, the lesson is taken to heart for a little while, but a new generation grows up which forgets or never knew the old experience, and the mistake is repeated. The relations of trade are 174 HJSTORY OF AMERICAN CURRENCY.

often spoken of as a machine, and such indeed they ought to be—a complex machine, with parts so regulated that it can go on at any speed and for any length of time, without danger of anything more than an occasional and temporary derangement ; but this reckless, although skilful, extension of groundless credit is more like the performance of the juggler who keeps first three, then four, then five, and so on, balls in the air at once. If he goes on continually increasing the number, it is physically certain that he will sooner or later miss one of them, and the whole will fall to the ground in confusion. BANK EXPANSION. The bank expansion from 1848-1851 was as follows: CIRC. DEP. SPEC. 1848 .... 128,500,000 108,200,000 46,300,000 1849 .... 114,700,000 91,100,000 43,600,000 1850 .... 131,300,000 109,500,000 45,300,000 1851 .... 155,100,000 128,900,000 48.600,000 These figures are not as trustworthy as one might wish. They represent the status on January 1, or as near that date as possible, and minor HISTORY OF AMERICAN CURRENCY. 175 fluctuations are not represented. A well-defined movement, however, was apparent before 1851.

The currency set towards the financial centres, country banks keeping their balances generally in New York. These balances were required in the fall, and the withdrawal of them produced con • traction and stringency at that season. Weekly bank statements were not made by any banks until August 6, 1853, when the New York banks began the custom, and others gradually followed. In 1851 there was an export of gold with unfavorable exchange, and a drain upon the banks. As no reports were published, the extent of this drain was not known, but a writer in 1857 states that it amounted to twelve millions in June and July, and that the stock remaining in the New York banks was only six millions. The consequence was a sharp contraction and great suffering, which finally caused the Secretary of the Treasury to buy bonds for the relief of the market. The same course of events, more or less marked, occurred throughout this period. Currency flowed to New York during the summer, was loaned on call (interest being paid for deposIj6 HISTORY OF AMERICAN CURRENCY.

its), was withdrawn in the fall, producing contraction of loans and stringency. It was asserted at the time that the worse the currency the more mobile it will be, and the assertion is true; but it is still more true that when the currency is unequally bad it will flow to the financial centres. Gold was being exported as a commodity all the time, but the exchanges showed the pressure of the redundant paper at New York, and caused a demand of gold for export with chronic overtrading. This was, according to the doctrines of the Bullion Report (discussed in Chapter II), a warning that the issues were excessive. The New York banks of course felt the weight of the evil. The warning came to them in actual experience, but the pressure of the country issues, which were never regulated by the exchanges at all, continued, and the metropolitan banks do not seem to have taken measures to restrain them.

The usury law, although disregarded in private practice, made it impossible for the banks to publish a usurious rate, and thus control discounts by this means. They could only exert a HISTORY OF AMERICAN CURRENCY, direct contraction on their issues and loans whenever the drain upon them made it necessary, and the pressure of this was, of course, most severe in the city itself. STATE OF AFFAIRS IN 1853-4. In 1853 the fears of war in Europe produced anxiety with regard to financial affairs both in England and here. The bank rate was at 5 per cent, throughout the autumn in London. Railroad building here amounted to 2,452 miles in that year. Stock speculation wras unusually active throughout the winter and spring, and prices were high. Undefined fears of the effects of a European war led to greater restraint in loans during the summer, and stocks suffered a fall. Many of the earlier speculations in exports to California had proved disastrous, and their results now accumulated. The discovery of a fraudulent issue of two millions of New York and New Haven Railroad stock was followed by similar discoveries in regard to some other stocks, and the result was a panic on the exchange.